Current developments in Judicial Law, Legislation, and Executive Action together with a foretaste of Emergent Trends in law and the legal profession for the complete Minnesota lawyer.
• Default interest rate enforceable in bankruptcy. The 8th Circuit has held that a clause in a Note which provided that upon default, the interest rate on remaining principal would be 5% in addition to the 5.04% interest rate, was enforceable in a bankruptcy proceeding. In an appeal from the USDC-MN, the court affirmed the bankruptcy court’s allowance of CW Capital’s proof of claim, which included the default interest. The debtors asserted that the default interest provision was an unenforceable penalty under Minnesota law and that the rate was disproportionate in amount. The court noted that under Minnesota law, liquidated damages in a fixed amount can be allowed without proving actual damages. The court looked then to the contractual facts and circumstances and found that actual damages on securitized commercial loans were unique and difficult to quantify, were not readily ascertainable and affirmed the judgment allowing the claim as filed. In re: Bowles Sub Parcel A, LLC et al. v. CW Capital Asset Management LLC, 2015 WL 4035375, No. 14-1055, (8th Circuit, 7/1/2015).
• Debtor lacks standing to appeal. In the case of, the court denied the Debtor’s appeal from an order allowing a general unsecured claim in Debtor’s Chapter 13 case. The court noted that appellate standing in a bankruptcy appeal is narrower than ordinary prudential standing. Applying the person aggrieved doctrine, the court found that standing was limited to a person aggrieved by an order which “diminishes their property, increases their burden or impairs their rights.” In this case, the Debtor has no pecuniary interest in the distribution of the assets of the case. The court further noted that the only exception to this general rule was if there was a surplus of funds in the estate which could be returned to the debtor after administration. In this case, the Debtor was not paying Chapter 13 claims in full so there was no such surplus. The court went on to dismiss the appeal for lack of jurisdiction. In re Robb, 2015 WL 4287950, (8th Cir. BAP, 7/16/2015).
• Child tax credit exemption allowed under state law. For several years, the debtor’s ability to exempt federal tax refunds based upon the Child Tax Credit (CTC) has been unclear. There were legislative changes in 2001 by Congress that modified the credit to assist low-income families. (Economic Growth and Tax Reconciliation Act of 2001. Pub. L. No 107-16). In 2003, Congress increased the tax credit (Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. 108-27) and in 2004 the Congress extended the $1000 credit for all future years and accelerated the refundability rate (Working Families Relief Act of 2004, Pub. L. 108-311). Further changes were made to the laws in 2008, 2009 and 2010 that enabled more low-income earners to claim an increased refund. Since then, these benefits have been extended through 2017 and increased to a minimum of $3,000. All of the legislative history after 2001 strongly suggests that the CTC is a “public assistance benefit.”
The laws of many states allow for an exemption claim in “public assistance benefits.” Minnesota, Illinois, Missouri, Idaho and Indiana are but a few of those states in which the bankruptcy court has addressed the issue and the decisions vary as to exemption allowance. The bankruptcy court in Minnesota, relying on the BAP opinion below in this case, has denied an exemption for CTC refunds in In re Dmitruk, 2014 WL 2600280 (June 2014).
More recently, the 8th Circuit Court of Appeals has suggested that the CTC refunds are “public assistance” and exempt under any state law that allows a public assistance exemption. The 8th Circuit indicated that the bankruptcy court and the BAP focused too narrowly on the CTC as originally enacted and failed to consider the legislative history of the amendments that followed, which indicated that Congress intended “to benefit the needy” with the Child Tax Credit. In re Pepper Minthia Hardy, 787 F.3d 1189, (8th Cir. 6/2/2015).
–Timothy D. Moratzka
DeWitt Mackall Crounse & Moore S.C.
• Restitution: Victim’s role as aggressor not grounds upon which to reduce restitution order. Appellant was confronted by D.S. about marijuana that appellant sold D.S. months earlier. D.S. followed appellant as he tried to leave and attacked him. Appellant drew a knife and stabbed D.S. twice, causing serious injuries to D.S. Appellant ultimately pleaded guilty to terroristic threats, and D.S. filed a request for restitution. Appellant requested that the restitution award be reduced because D.S. was the initial aggressor, and the district court granted appellant’s request. The state appealed and the court of appeals reversed. Appellant’s petition for review was accepted by the Supreme Court.
The Supreme Court employed principles of statutory construction to determine if the two factors listed in Minn. Stat. §611A.045, subd. 1 (amount of economic loss sustained by the victim as a result of the offense, and the income, resources, and obligations of the defendant), are the only two factors a district court may consider when imposing restitution. The plain language of § 611A.045, subd. 1, provides an exclusive list of factors for determining the amount of restitution to award, based on the common and approved meaning of the words and the surrounding statutory provisions. The court also holds that the phrase “as a result of the offense” does not allow a district court to consider “the circumstances of the offense and the victim’s role.” State v. Brandon Wayne Riggs, Sup. Ct. 7/1/15.
• Criminal procedure: District court judge may hear request to disqualify judge for cause, and may not prevent moving party from seeking review from chief judge. Appellant was convicted of second-degree assault and placed on probation. After violating his probation, prior to the probation revocation hearing, appellant moved to disqualify the judge “based on a reasonable question of [judicial] impartiality,” or, in the alternative, for the chief judge to hear his motion or stay the proceedings to allow an independent tribunal to determine whether the judge violated the Code of Judicial Ethics by not recusing. The district court denied appellant’s motions and, rather than referring the motion to the chief judge, commenced the probation revocation hearing. Following the hearing, the court revoked appellant’s probation. Appellant appealed, arguing the district court erred by declining to refer his motion to the chief judge. The court of appeals affirmed his probation revocation, and appellant petitioned the Supreme Court for review.
Unlike the denial of a motion for peremptory removal of a district court judge, the Supreme Court has never held that the denial of a motion to remove a judge for cause must be challenged via a petition for writ of prohibition. A petition for writ of prohibition is not required to obtain appellate review of a request to disqualify for cause under Minn. R. Crim. P. 26.03, subd. 14(3). While Minn. R. Crim. P. 26.03, subd. 14(3) directs the chief judge to hear and determine a request to disqualify a judge for cause, a party is entitled to ask the district court judge directly for voluntary disqualification. Such a request does not constitute a waiver of the party’s right to have the chief judge hear his removal motion. The court points out that appellant made his motion in the alternative, seeking voluntary disqualification from the judge and, in the alternative, for review by the chief judge. As such, he did not waive his right to have the chief judge hear his motion.
Finally, while the district court had authority to first hear appellant’s request to disqualify, it did not have authority to deny his alternative request to refer the removal motion to the chief judge. This denial deprived appellant of his right under Minn. R. Crim. P. 26.03, subd. 14(3), to have the chief judge hear and determine his request. This error was not harmless, because, at the sentencing hearing for second-degree assault, the judge told appellant he would revoke his probation for any violation, and speculated that appellant had “duped” the court when he exercised his right to appeal. Because the judge prejudged appellant’s probation revocation proceeding, his impartiality is called into question, and vacation of the probation revocation order is required. State v. Alton Dominique Finch, Sup. Ct. 7/8/15.
• Criminal procedure: Prosecutor acts in bad faith by dismissing and refiling complaint after court’s refusal to continue trial. The day before appellant’s DUI trial, the state learned the arresting officer left the state for a job interview and would not be able to testify. The state informed the court of the trooper’s absence when the case was called the next morning, and requested a continuance, informing the court that, if its request was denied, the state would dismiss the case and recharge it. The continuance request was denied, and the state dismissed the case. Two weeks later, the state refiled the charges. The district court denied appellant’s motion to dismiss, finding that the state had not acted in bad faith. After a stipulated facts trial, appellant was convicted, and he appealed, challenging the district court’s refusal to dismiss the refiled complaint.
Minn. R. Crim. P. 30.01 permits the state to dismiss a complaint or tab charge without the court’s approval, if the prosecutor states the reasons for the dismissal in writing or on the record. Cases interpreting this rule have held that a dismissed complaint may only be refiled if it was dismissed in good faith. The state made clear in this case it was dismissing the complaint to bypass the court’s denial of the state’s motion to continue the trial. Minnesota law permits only the court to effect a continuance, and the court has exclusive case management authority. While the state has discretion to dismiss a charge, it is improper for the state to use that power to impede upon the court’s authority.
Held, when a prosecutor voluntarily dismisses a complaint to initiate a dismiss-and-refile tactic and to circumvent the district court’s denial of a continuance motion, the prosecutor acts in bad faith in both the dismissal and the refiling. State v. Douglas John Olson, Ct. App. 7/13/15.
• Prostitution: Criminal prostitution statute not facially overbroad under the 1st Amendment. Appellant was convicted of multiple counts of prostitution-related offenses, stemming from his involvement in a prostitution scheme. On appeal, appellant argues that the statute criminalizing the solicitation and promotion of prostitution, specifically the definition of “prostitution,” is facially overbroad and violates the 1st Amendment.
The criminal prostitution statute regulates both conduct and speech, because it prohibits soliciting or inducing an individual to practice prostitution, and the common definitions of “solicit” and “induce” implicate speech. Minn. Stat. §609.322, subd. 1a(1). Similarly, the statute’s prohibition of the promotion of prostitution also involves a combination of speech and conduct. Minn. Stat. § 609.322, subd. 1a(2). The prostitution statute is content-based, because it proscribes a particular type of speech (speech used to solicit, induce, or promote prostitution). However, the speech it proscribes is integral to criminal conduct, so it is outside the ambit of the 1st Amendment’s protection.
To be constitutional, a statute that punishes speech based on its content must not be overbroad. Appellant argues that the prostitution statute is overbroad because it prohibits or chills a substantial amount of protected speech, along with unprotected speech. Specifically, he argues that the statute unconstitutionally criminalizes the solicitation, inducement, or promotion of consenting adults to portray themselves in non-obscene films and photographs depicting sexual penetration and/or sexual contact, and lap dancing. First, the prostitution statute does not criminalize or prohibit the solicitation, inducement, or promotion of adults to portray themselves in films or photographs. Second, lap dancing is “lewd” and “lascivious” behavior and, therefore, obscene conduct not protected by the Constitution. So, even if the prostitution statute did criminalize or prohibit lap dancing, the statute is not overbroad because it does not proscribe constitutionally protected activity. Even if lap dancing is not obscene, the prostitution statute is not overbroad, because there is no substantial overbreadth here. State v. Antonio Dion Washington-Davis, Ct. App. 7/13/15.
• DWI: Presence of more than one child in vehicle at time of offense may constitute only a single aggravating factor. Appellant was convicted of DWI after driving while intoxicated with three children in her vehicle. Although this was her first DWI charge, the state counted each child present in the vehicle as a separate aggravating factor, and charged her with second-degree DWI. Minn. Stat. §169A.095 permits each qualified prior impaired driving incident within the 10 years immediately preceding the current offense to be counted as a separate aggravating factor. However, Minn. Stat. §169A.09 requires that the prior impaired driving incident arise out of a separate course of conduct. The statute does not specifically address whether multiple children in the vehicle may be counted as multiple aggravating factors under Minn. Stat. §169A.03, subd. 3(3).
Held, the presence of one or more children, in the vehicle at the time of the offense may constitute only one aggravating factor. The statute plainly states that the presence of “a child” is an aggravating factor. In the impaired driving statutes, the legislature demonstrated its ability to provide for aggregating a factor for enhancement purposes, but did not do so concerning the presence of a child in the vehicle. Appellant’s second-degree DWI conviction is reversed and the case is remanded to the district court with instructions to enter a conviction for third-degree DWI. State v. Tarah Louise Fichtner, Ct. App. 7/13/15.
• DWI: Test refusal statute does not violate unconstitutional conditions doctrine. Appellant was involved in a vehicle collision, after which he failed field sobriety tests and a PBT. He refused a breath test after being read the Implied Consent Advisory. After a stipulated facts court trial, appellant was found guilty of third-degree test refusal. On appeal, appellant argues that the test refusal statute violates the unconstitutional conditions doctrine because it compels a person to relinquish 4th Amendment rights as a condition of maintaining a driver’s license and avoiding criminal punishment.
As observed in State v. Netland, 762 N.W.2d 202 (Minn. 2009), which the court of appeals notes is still good law if Netland’s reliance on State v. Shriner, 751 N.W.2d 538 (Minn. 2008) (overruled by Missouri v. McNeely, 133 S.Ct. 1552 (2012)) is replaced with State v. Bernard, 859 N.W.2d 762 (Minn. 2015), the unconstitutional conditions doctrine is properly raised only when a party has successfully pleaded the merits of the underlying unconstitutional government infringement. Citing Bernard, the court holds that the warrantless breath test appellant refused would not have been an unconstitutional search, because it would have been a valid search incident to an arrest. Because appellant cannot establish that the test refusal statute authorizes an unconstitutional search, his unconstitutional conditions argument fails.
Chief Judge Cleary concurred specially to emphasize his interpretation of Bernard’s search incident to arrest exception is limited to providing that a warrantless breath test is constitutional under these facts. As such, he believes that an unconstitutional conditions challenge to the test refusal statute in the context of a blood or urine test refusal may be successful. State v. David Ray Bennett, Ct. App. 7/27/15.
• Postconviction: Petition may be denied for untimeliness, even if state did not assert defense of untimeliness, so long as parties given notice and opportunity to be heard on issue. Appellant was convicted of failure to register in 2007, and filed a postconviction petition seeking to withdraw his guilty plea in 2014. In its response, the state opposed the petition on the merits, and did not address the timeliness of the petition. The postconviction court denied appellant’s petition on the grounds that it was untimely under Minn. Stat. §590.01, subd. 4(c), and because appellant did not satisfy the interests-of-justice exception of Minn. Stat. §590.01, subd. 4(b)(5). On appeal, appellant argues the state waived the defense of untimeliness by not asserting it in its answer to appellant’s petition.
The court of appeals looks to federal cases for guidance on this issue of first impression, specifically Day v. McDonough, 547 U.S. 198 (2006), which held that the district court is permitted, but not obliged, to consider, sua sponte, the timeliness of a petition for writ of habeas corpus, if the parties receive fair notice and an opportunity to be heard, because the timeliness of a petition implicates values beyond the concerns of the parties, such as judicial efficiency, conservation of judicial resources, accuracy of judgments, and finality. Wood v. Milyard, 132 S.Ct. 1826 (2012), further clarified that the district court may consider the timeliness of a habeas petition and dismiss it on that basis only if the prosecution merely forfeited the statute of limitations defense, rather than intentionally, knowingly, and expressly waiving the defense.
Here, the state did not intentionally, knowingly, and expressly waive the defense of untimeliness, so the postconviction court was permitted to consider, sua sponte, the petition’s timeliness. However, the issue of whether the petition was barred by the two-year limitations period in Minn. Stat. §590.01, subd. 4(c), was not raised in appellant’s petition or the state’s answer. The court should have given appellant an opportunity to present his position on Minn. Stat. 590.01, subd. 4(c), before considering and disposing of the petition on that ground. However, this lack of notice and opportunity to present argument is inconsequential, because the court also determined that the petition should be denied because he did not satisfy the interests-of-justice exception of Minn. Stat. §501.01, subd. 4(b)(5) (the only exception appellant invoked in his petition). Appellant had the opportunity to present argument on the interests-of-justice exception before the court denied his petition on that ground, and his failure to satisfy this exception is a sufficient basis for the denial of the petition. The postconviction court’s decision is affirmed. Lane Francis Weitzel v. State, Ct. App. 7/20/15.
• Perjury: False statement is “material” if it has natural tendency to influence, or is capable of influencing, the decision of the decision-making body to which it is made. During his trial for criminal sexual conduct, appellant claimed to have served four and a half years in the Army, which included overseas deployment, serious injury, receipt of two Purple Hearts, and medical discharge. After a hung jury, law enforcement learned appellant never served in the military. A second trial resulted in appellant’s conviction. At his sentencing hearing, he admitted to lying about his military service. The state subsequently charged him with felony perjury. The only issue at his stipulated facts court trial was whether his false statements were “material” under Minn. Stat. §609.48, subd. 1. Appellant was adjudicated guilty, and he appealed the issues of the materiality of his statements.
“Material” is not defined in Minnesota’s criminal code. However, the perjury statute makes clear that a false statement need not have any effect to be material, and that the declarant’s state of mind is irrelevant to the issue of the materiality of the statement. Citing a previous version of the perjury statute and federal case law, the court of appeals concludes that a statement is “material” within the meaning of Minn. Stat. §609.48, subd. 1, “if the statement has a natural tendency to influence, or is capable of influencing, the decision of the decision-making body to which it is made.” In this case, the ultimate question is whether appellant’s claim of exemplary military service had a natural tendency to influence, or was capable of influencing, the jury’s assessment of his credibility during his criminal sexual conduct trial. The court finds that appellant’s claims were capable of influencing the jury’s decision, and holds that appellant’s statements regarding his military service were material. Appellant’s perjury conviction is affirmed. State v. Gary Lee Burnett, Ct. App. 7/20/15.
EMPLOYMENT & LABOR LAW
• Disability discrimination; perception claim fails. A janitor for the Minneapolis Public School system lost his disability discrimination claim under the Americans with Disabilities Act (ADA) and parallel Minnesota Human Rights Act long after he was not reinstated following a strength test he filed upon the recall from a lay-off. The 8th Circuit Court of Appeals, affirming the ruling of U.S. District Court Judge David Doty, held that there was insufficient evidence that he was “regarded as” disabled to invoke the perception of disability provisions of the two laws, nor was there any actionable retaliation. Fischer v. Minneapolis Public Schools, 2015 U.S. App. LEXIS 11727 (8th Cir. 7/8/2015).
• Privacy rights; no retaliation but state claim allowed. A 1st Amendment retaliation claim by a firefighter-paramedic after he was fired for emailing his concerns about management was not actionable under the Federal Stored Wire and Electronic Communications Act, 18 U.S.C. §2701, et seq. because the emails that management viewed in his computer did not fall within the Act and the employer was entitled to qualified immunity on the Constitutionality claim. But the Eighth Circuit allowed the employee to amend the complaint and keep the case alive as a violation of the Missouri State Law protecting corporate privacy. Anzaldua v. Northeast Ambulance and Fire Protection District, 2015 U.S. App. LEXIS 11906 (8th Cir. 7/10/2015).
• Commissions & wages; standard to decide penalties. The determination of whether an employee paid wages on a commission basis is entitled to a statutory penalties for two late payments under Minn. Stat. §181.14, subd. 2. The average daily earnings up to 15 days was addressed by the Minnesota Court of Appeals. It held that the statute requires comparing the amount tendered in good faith by the employer and the amount subsequently judicially determined to be owing. If the amount owing is greater than the tender, the penalty applied. The case was remanded to the Hennepin County District Court to make that analysis. Toyota-Lift of Minnesota, Inc., v. American Warehouse Systems, 2015 Minn. App. LEXIS 48 (Minn. Ct. App. 7/13/2015).
• Nonsolicitation agreement; lack of approved consideration bars claims. The absence of an express recital of consideration in a two-year non-solicitation agreement bars its enforcement against an employee. The appellate court affirmed a Hennepin County District Court ruling denying an injunction against the employee because the Statute of Frauds, Minn. Stat. §513.01, requires a written memorialization for an agreement that cannot be performed within a year, and this agreement lacked any reference to consideration for the restriction. JAB, Inc., v. Naegle, 2015 Minn. App. LEXIS 46 (Minn. Ct. App. 7/13/2015) (unpublished).
• Misappropriation of trade secret; confession of judgment violation. A former employee who was subjected to an injunction against using a trade secret misappropriated from the former employer was required to pay the full amount of an $1,880,475 confession of judgment. Reversing a ruling of the Dakota County District Court, it held that the ex-employee violated the injunction against use of a misappropriated trade secret, which led to the confession of judgment, warranting payment of the additional amount owing under the confession of judgment. Analog Techs Corp. v. Knutson, 2015 Minn. App. LEXIS 624 (Minn. Ct. App. 7/13/2015) (unpublished).
• Unemployment claims; three employees lose. A trio of employees recently lost claims for unemployment compensation benefits before the Minnesota Court of Appeals, which affirmed all three denials by the Department of Employment and Economic Security (DEED).
A driver for a farm cooperative in western Minnesota was properly denied benefits because two incidents of negligent driving constituted disqualifying “misconduct.” Jacobson v. Wheaton – Dumont Coop Elevator, 2015 Minn. App. LEXIS 620 (Minn. Ct. App. 7/13/2015) (unpublished).
An adult supervisor of student school safety crossing grounds in Washington County was ineligible for benefits for two safety reasons: yelling at student guards and tardiness, both of which continued to constitute “misconduct.” Lee v. Ind. Sch. Dist. No. 833, 2015 Minn. App. LEXIS 621 (Minn. Ct. App. 7/13/2015) (unpublished).
An employee in northwestern Minnesota who quit because she feared she would be fired was not entitled to benefits. The employee’s desire to leave in good standing and receive a letter of recommendation did not constitute “good reason” to quit. Vasquez v. Cook Area Health Services, 2015 Minn. App. LEXIS 627 (Minn. Ct. App. 7/13/2015) (unpublished).
The Equal Employment Opportunity Commission (EEOC) has ruled that discrimination in the workplace on the basis of sexual orientation constitute a form of sexual discrimination violative of Title VII of the Federal Civil Rights Act.
The agency made the determination this summer in a narrow 3-2 vote on partisan grounds, building on the foundation of prior case law and EEOC rulings dealing with same-sex stereotyping and transgender discrimination. The agency reasoned that such discrimination is predicated “on sex-based differences.” The ruling, three weeks after the Supreme Court’s historic decision in favor of same-sex marriages in Obergefell v. Hodges, 135 S. Ct. 2584 (2015), is not binding on courts and is likely to be the focus of significant litigation. The decision brings the EEOC’s view in line with laws in Minnesota and 21 other jurisdictions banning workplace discrimination due to sexual orientation, a measure that Congress has refused to adopt despite various legislative initiatives over the last two decades.
A pair of important employment law cases is on the docket for the upcoming term of the U.S. Supreme Court, which begins in the first week of October.
In Tyson Foods, Inc. v. Bouaphakeo, No. 14-1146, the High Court will revisit the issues of overtime compensation and class creation certification when it reviews a $5.8 million judgment for production line employees in Iowa, which was affirmed by a narrowly divided 8th Circuit Court of appeals for time spent “donning and doffing” work-required apparel. 765 F.3d 791 (8th Cir. 2014).
The 2015-16 term also includes a labor law case challenging the imposition of mandatory union dues on public sector employees. Friedrichs v. California Teachers Assn., No. 14-915, could have impact on governmental employees in Minnesota under the Public Employees Labor Relations Act (PELRA) Minn. Stat. §197A.01, et seq.
–Marshall H. Tanick
HELLMUTH & JOHNSON, PLLC
• Minnesota Supreme Court concludes seasonal animal lot not a CAFO. The Minnesota Supreme Court held that a farm using fields as cropland in the summer and as an animal feeding site during the winter need not obtain a National Pollution Disposal Elimination System (NPDES) permit but must nonetheless obtain a state disposal system (SDS) permit. The Pope County, Minnesota, farm at issue uses a portion of its cropland as a winter feeding facility for cattle. Following the fall harvest, the farm places cattle on the lot, which consumes crop residues through the winter. In the spring, the farm moves the cattle off the lot and plants new crops for the growing season.
The Clean Water Act and EPA regulations require an NPDES permit for discharges from animal feeding operations (AFOs), which are facilities where at least 1,000 cattle are kept on the lot for more than 45 days in a 12-month period, and where “[c]rops, vegetation, forage growth, or post-harvest residues are not sustained in the normal growing season over any portion of the lot.” 40 C.F.R. §122.23(b)(1). MPCA argued that the phrase “sustained in the normal growing season” should take into account the period during which the animals are present, and that because crops are “not sustained” on the Pope County farm through the winter, therefore the facility was an AFO and required an NPDES permit. Moreover, MPCA claimed the Court should defer to its interpretation of this phrase, in accordance with In re Cities of Annandale & Maple Lake NPDES/SDS Permit Issuance for the Discharge of Treated Wastewater, 731 N.W.2d 502 (Minn. 2007).
The Court disagreed, holding that Annandale does not require deference to an agency’s interpretation of a regulation where the language is unambiguous. In this case, the Court found the regulation was unambiguous—if crops are sustained on the lot during the “normal growing season” (which, in this case, they were), then under the plain language of section 122.23(b)(1), the lot is not an AFO. However, the Court determined that the farm would require an SDS permit because, under MPCA rules, it met the definition of an “animal feeding facility” and did not qualify for the “pasture exemption” under Minn. Stat. §116.07, subd. 7d (which the Court held required a vegetative ground cover during the entire growing season, even during the very early part of the season, when crops were being planted). In re Reichmann Land & Cattle, LLP, A13-1461, 2015 WL 4597534, at *1 (Minn. 7/29/2015).
• Minnesota Court of Appeals addresses matter of first impression under MERA. On August 10, 2015, the Minnesota Court of Appeals affirmed the lower court’s dismissal of a Minnesota Environmental Rights Acts (MERA) claim because the city ordinance alleged to be violated did not constitute an environmental quality standard, limitation, or rule under MERA. The case involved a dispute between neighbors over an alleged violation of the Wayzata City Code’s prohibition against the granting of private easements for lakeshore access. To maintain an action under MERA, a plaintiff must make “a prima facie showing that the conduct of the defendant has, or is likely to cause the pollution, impairment, or destruction” of natural resources. Minn. Stat. §116B.04. “Pollution, impairment, or destruction” is defined as (1) “any conduct by any person which violates, or is likely to violate, any environmental quality standard, limitation, rule, order, license, stipulation agreement, or permit of the state or any instrumentality, agency, or political subdivision thereof which was issued prior to the date the alleged violation occurred,” or (2) “any conduct which materially adversely affects or is likely to materially adversely affect the environment.” Minn. Stat. §116B.02, subd. 5. Appellants in this case invoked only the second prong of this definition, alleging that a violation of the Wayzata easement ordinance constituted a violation of an “environmental quality standard, limitation, rule, order, license, stipulation agreement, or permit.”
The court noted that no court had yet interpreted this phrase and commended the district court’s reference to the more developed case law on the second prong of the definition (“materially adversely affects”) to help interpret the first. Following the district court’s lead, the court held that under the first prong of section 116B.02, subdivision 5, an “environmental quality standard, limitation, or rule” is “a standard, limitation, or rule with a primary purpose of protecting Minnesota’s natural resources.” The court concluded that the Wayzata lakeshore access ordinance did not have protection of natural resources as its primary purpose; it was not an environmental quality standard for purposes of MERA and therefore, the claim failed. State ex rel. Afremov v. Remes, A14-2037 (Minn. Ct. App. 8/10/2015).
• Minnesota Court of Appeals interprets new trout stream setback statute in silica sand case. In a recent case, the Minnesota Court of Appeals interpreted a 2013 statute requiring that within the boundaries of the Paleozoic plateau ecological section, no silica sand mining may occur within one mile of a designated trout stream unless the Minnesota Department of Natural Resources (DNR) commissioner has first issued a silica sand mining trout stream setback permit. Minn. Stat. §103G.217. The permit requirement applies only to “new silica sand mining projects and projects for which environmental review documents have been noticed for public comments after 4/30/2013.” 2013 Minn. Laws ch. 114, art. 4, §66, at 1732.
At issue was a Houston County silica sand mine that since 1992 had been operating under a conditional use permit (CUP), which had been renewed every five years. The CUP authorized silica sand mining and placed no limit on the amount of sand that could be mined. In 2009, relators entered an agreement with the Minnesota Sands company that would have significantly expanded the mining operations. In 2012, the county enacted a moratorium on new silica sand mining projects and ordered preparation of an environmental assessment worksheet (EAW) for the relators’ proposed mine expansion. The county also delayed processing relators’ timely CUP renewal application pending completion of the EAW. Subsequently, relators terminated their agreement with Minnesota Sands. As a result, the county no longer required an EAW and processed the CUP renewal. Although the renewal occurred beyond the five-year permit period, the county’s standard practice was to allow mines to continue operating under a prior CUP during such delays. However, the Minnesota Department of Natural Resources (DNR) determined that the delayed renewal of the CUP meant that the mine was a “new silica sand mining project” and was now subject to the new setback requirement in section 103G.217.
The court reviewed DNR’s determination de novo and concluded that relators’ sand mine was not a “new project” within the ambit of section 103G.217. In reversing the DNR, the court held that under common meanings of the key statutory terms, relators’ “project”—extracting sand for sale—was not new but had been in existence for over two decades. In addition, the Court deferred to the County’s interpretation of its handling of the CUP as an “extension” or “renewal” of an existing CUP, not a new permit. Erickson v. Minnesota Dept. of Natural Resources, No. A14–1732 (Minn. Ct. App. 7/20/2015).
• EPA finalizes carbon air emission standards for existing power plants. On 8/3/2015, the U.S. Environmental Protection Agency (EPA) finalized the first-ever performance standards for carbon emissions from existing power plants in the United States under section 111(d) of the Clean Air Act. ____ Fed. Reg. ____. President Obama called the so-called “Clean Power Plan” the administration’s “biggest step yet to combat climate change.” Whereas the proposed rule aimed to reduce carbon emissions from existing power plants by 30 percent compared to 2005 levels, the final rule is more ambitious, setting the goal at 32 percent.
Under section 111 of the Act, performance standards for pollutants such as CO2 must be based upon the degree of emission limitation achievable through the application of the “best system of emission reduction” (BSER). In this case, EPA identified four broad “building blocks” that together constitute BSER for existing power plants: making plants more efficient, increasing the use of low-carbon power sources such as natural gas, using more low-carbon power sources (e.g., solar, wind), and increasing energy efficiency.
On the basis of these BSER building blocks, the final rule establishes CO2 emission performance rates for two subcategories of affected electric generating units (EGUs)—fossil fuel-fired electric utility steam generating units and stationary combustion turbines. The rule then sets state-specific CO2 goals, expressed as both emission rates and as mass, that reflect the subcategory-specific CO2 emission performance rates and each state’s mix of affected EGUs subject to the two performance rates. States can determine the methods they will use to comply with the CO2 goals, which could include emissions credit trading between sources or even between states. Finally, the rule provides guidelines for the development, submittal and implementation of state plans that implement the BSER emission performance rates either through emission standards for affected EGUs, or through measures that achieve the equivalent, in aggregate, of those rates as defined and expressed in the form of the state goals. The final rule provides up to 15 years for full implementation of all emission reduction measures, with incremental steps for planning and then for demonstration of CO2 reductions, to ensure that progress is being made in achieving CO2 emission reductions.
Concurrent with the final rules for existing power plants, the EPA also issued a final rule establishing CO2 emission standards of performance for new, modified, and reconstructed power plants. More information on both final rules, including the agency’s preamble (excerpts of which are included above), can be found on EPA’s website.
–Jeremy P. Greenhouse
The Environmental Law Group, Ltd.
For more information and to view background documents and links associated with these updates, please visit Jeremy’s environmental law blog, Fire on the River, at www.jeremygreenhouse.com.
• Child support; Social Security derivative benefits. The Supreme Court has now resolved the issue of how Social Security derivative benefits are to be accounted for in the context of a post-decree child support obligation.
The obligor’s monthly support obligation was $1,977. During the six-month period from February through July 2012, the obligee received child support from the obligor as well as monthly derivative benefits for the children from Social Security of $1,748. In July 2012, the obligor brought a motion to modify support, seeking both a reduction in his ongoing monthly support obligation based on the Social Security benefits and credit for the six months of overpayments.
The CSM subtracted the derivative benefits from the obligor’s monthly support obligation and determined that he should pay $229 per month. The CSM also calculated that the obligee had received an overpayment of $6,992 after reducing the amount of the overpayment by the obligor’s share of unreimbursed medical expenses that had accrued. The CSM’s order stated that the overpayment would be applied to any arrearage and that any remaining portion would “be addressed as provided by statute and/or applied to additional unreimbursed/uninsured expenses.” Motions for review were filed and the district court amended the order to provide that the overpayment also could be applied to the obligor’s prospective support obligation.
Dakota County appealed, contending that the overpayment should not be applied to the obligor’s prospective support obligation or to the obligor’s arrearages or his share of unreimbursed/uninsured expenses. At the center of the appeal was the court of appeals’ decision in County of Grant v. Koser, 809 N.W.2d 237, 244-45 (Minn. Ct. App. 2012), which held that an obligor was entitled to credit against his prospective support obligation for an overpayment resulting from the obligee’s receipt of Social Security derivative benefits. Dakota County argued that Koser was wrongly decided and that the Court of Appeals should overrule Koser and reverse the district court. The court of appeals rejected these arguments and affirmed the district court. The court of appeals reasoned that the obligor was entitled to credit for the overpayment because the subtraction for Social Security derivative benefits provided for by Minn. Stat. §518A.31(c) and Minn. Stat. § 518A.34(f) and did not require a modification motion.
The Supreme Court reversed, explaining that the court of appeals in the existing case and in Koser misinterpreted these sections of chapter 518A by failing to consider the context in which those sections operate. Both provisions are part of the overall methodology for calculating child support within chapter 518A. As such, neither provision is an independent basis for modifying child support. Thus, accounting for the receipt of Social Security derivative benefits is to be addressed through the modification provisions of Minn. Stat. §518A.39. The decision was reversed and remanded for further proceedings.
In dissent, Justice Page defended the rationale of Koser, arguing that offsetting a child support obligation by the derivative benefits was required by the plain language of Minn. Stat. §518A.31(c) and Minn. Stat. §518A.34(f) and did not constitute a retroactive modification of support because the amount of support the children were to receive was unchanged, only the source of funds through which the obligor would be fulfilling his support obligation. In re Dakota County, No. A13-1240, ___ N.W.2d ___ (Minn. 2015).
• OFPs; standard of proof. In a published decision, the court of appeals held that the standard of proof for issuing an order for protection is a preponderance of the evidence.
The mother of a 12-year-old boy sought an OFP after he told her that his father had spanked him during his father’s parenting time. The boy claimed that his father had spanked him between 10 and 20 times but the father claimed that he spanked the boy twice. A hearing was held in which both parties appeared pro se. The hearing was continued so that the mother could provide notice to the father by email of the statements the son had made to her, to a police officer, to his mental health case manager, and to his psychologist that the mother intended to offer into evidence. The father provided an incorrect email address at the hearing and, for that reason, never received the mother’s email regarding the boy’s out-of-court statements regarding the alleged abuse.
The mother appeared for the continued hearing with counsel and the father was still pro se. The mental health case manager and psychologist testified and were cross-examined by the father. The hearing was not completed in one day and so another hearing date was set. At that hearing, father again appeared pro se. The court found that the father had committed two acts of domestic abuse against the boy and issued the OFP. (The opinion does not include any detail on the specific acts of domestic abuse.)
The father appealed, arguing that the admission of the boy’s out-of-court statements deprived him of due process and that a preponderance of evidence did not exist in the absence of those statements. This argument failed because the father never requested that the boy testify and the statements were properly admitted by the district court under Minn. R. Evid. 807.
(It is interesting that the court of appeals chose to use this case as an opportunity to issue a published opinion holding that the standard of proof for orders for protection is preponderance of the evidence, because the opinion does not include any details concerning the specific evidence that satisfied that standard.) Oberg v. Bradley, No. A14-1693, ___ N.W.2d ___ (Minn. Ct. App. 2015).
• Security for spousal maintenance. A frightening unpublished decision from the court of appeals calls into question provisions for securing spousal maintenance obligations with life insurance.
The parties’ stipulated judgment and decree required husband to pay permanent spousal maintenance to wife of $2,250 per month until “the earliest of the death of either party, remarriage of [w]ife, or further [o]rder of the [c]ourt.” Husband was required to maintain a life insurance policy to secure his child support and spousal maintenance obligations to wife as follows:
As long as [h]usband has child support and/or spousal maintenance obligations to [w]ife, he shall maintain a policy of insurance on his life, naming [w]ife or a trust as the primary beneficiary thereon with a death benefit at least sufficient to fund his remaining child support and/or spousal maintenance obligations.
Within thirty (30) days after entry of the [j]udgment and [d]ecree, [h]usband may establish a trust and designate the trust as the beneficiary of the life insurance coverage on behalf of the children. The terms of the trust shall specifically direct the trustee to use the proceeds for the payment of [h]usband’s obligations under the terms of the [j]udgment and [d]ecree until the funds are exhausted. If there are sufficient funds in the trust for payment of [h]usband’s obligations under the terms of this [j]udgment and [d]ecree, any excess life insurance proceeds may be paid to such other beneficiaries as [h]usband may designate….
If, in the event of [h]usband’s death, it is determined that [h]usband has failed to maintain life insurance in accordance herewith, [w]ife shall have a claim against [h]usband’s estate in an amount sufficient to fund his remaining child support and/or spousal maintenance obligations.
Husband obtained a life insurance policy with a death benefit of $280,000. He designated wife to receive 10 percent of the benefit and designated each of the parties’ two children, one of whom was a minor and autistic, to receive 45 percent of the benefit. In 2013, husband was diagnosed with terminal cancer. He executed a will and established a revocable trust, leaving his entire estate for the benefit of the parties’ sole minor child in a supplemental needs trust. None of husband’s estate planning contained any provision for wife’s spousal maintenance. In 2014, the parties appeared for hearing on cross-motions addressing a number of issues, one of which was wife’s motion to require husband to name her as the primary and sole beneficiary of his life insurance policy.
The district court denied wife’s motion, reasoning that husband’s spousal maintenance obligation to wife would cease to exist upon his death. (Husband died in 2015.) The court of appeals affirmed, holding that because the dissolution decree did not expressly state that husband’s obligation to pay spousal maintenance continued beyond his death, the presumption of Minn. Stat. §518A.39, subd. 3, that spousal maintenance ends upon the obligor’s death, was not rebutted. Since husband was not obligated to pay spousal maintenance beyond his death, he was not required to name wife as the primary sole beneficiary of his life insurance policy since there was no obligation to secure. Sager v. Sager, No. A14-2071, (Minn. Ct. App. 7/20/2015).
Henson & Efron
• 28 U.S.C. §1359; collusively manufactured diversity jurisdiction. Where a Missouri corporation had been merged into a newly-established Florida corporation days before the Florida corporation commenced a diversity action, and the district found that the corporate maneuvers had been undertaken to manufacture diversity jurisdiction, the 8th Circuit acknowledged the dearth of controlling authority on manufactured jurisdiction, rejected the plaintiff’s criticism of the district court’s use of a six-factor test, and found that “the evidence as whole” supported the district court’s finding of manufactured diversity jurisdiction. The Branson Label, Inc. v. City of Branson, ___ F.3d ___ (8th Cir. 2015).
• Exclusion of alleged contingent fee expert witness; clear error. An 8th Circuit panel that included Judge Schiltz sitting by designation held that a district court had clearly erred in excluding the testimony of the plaintiffs’ treating physician and expert witness, finding no evidence to support the district court’s determination that the physician’s compensation was contingent on the outcome of the litigation. The panel opinion includes a detailed survey of case law addressing the admissibility of testimony by experts compensated on a contingent basis, but expressly declined to decide whether such testimony might be admissible within the 8th Circuit. Taylor v. Cottrell, Inc., ___ F.3d ___ (8th Cir. 2015).
• Right to marry; general assurances of compliance; mootness. Reaching decisions in three cases that were pending on appeal from Arkansas, South Dakota and Nebraska when the United States Supreme Court decided Obergefell v. Hodges, the same 8th Circuit panel held in all three cases that the states’ “general assurances of compliance” were insufficient to moot the cases, and that the appropriateness of ongoing injunctive relief was a matter that could be considered by each district court on remand. Jernigan v. Crane, ___ F.3d ___ (8th Cir. 2015); Rosenbrahn v. Daugaard, ___ F.3d ___ (8th Cir. 2015); Waters v. Ricketts, ___ F.3d ___ (8th Cir. 2015); Obergefell v. Hodges, 135 S. Ct. 2584 (2015).
• Declaratory judgment; “reasonable apprehension of suit,” Fed. R. App. P. 38. Affirming Judge Schiltz’s “well-reasoned judgment,” the 8th Circuit held that the district court properly exercised jurisdiction over the defendant’s declaratory judgment counterclaims where the defendants had “an objective, reasonable apprehension of suit.” The 8th Circuit also denied the counterclaim-plaintiff’s request for attorney’s fees on appeal under Fed. R. App. P. 38, finding that the issues raised on appeal “were not wholly without merit.” U.S. Water Servs., Inc. v. ChemTreat, Inc., ___ F.3d ___ (8th Cir. 2015).
• Stipulation permitting amendment of complaint; no waiver of right to motion to dismiss. In an unpublished per curiam opinion, the 8th Circuit held that a defendant’s failure to object to a Magistrate Judge’s Order permitting the filing of an amended complaint does not preclude a subsequent motion to dismiss that amended pleading. Onuoha v. Int’l Univ. of Nursing, LLC, 2015 WL 4508835 (8th Cir. 7/27/2015).
• Media entities’ motion to intervene to access conference denied. Finding no 1st Amendment right to access civil proceedings or civil court filings, Judge Frank denied multiple media entities’ motion to intervene for purposes of gaining access to what he described as “a potential confidential settlement meeting… in the nature of a preliminary mediation.” Karsjens v. Jesson, 2015 WL 4715352 (D. Minn. 8/7/2015).
• Stay of proceedings pending appeal from denial of motion to compel arbitration. Where the defendant appealed the denial of its motion to compel arbitration to the 8th Circuit and moved to stay proceedings in the district court pending the resolution of its appeal, Judge Magnuson, acknowledging a split of authority nationally and the absence of any controlling authority, followed the “majority” rule and granted the defendant’s motion to stay. Messina v. North Central Distributing, Inc., 2015 WL 4479006 (D. Minn. 7/22/2015).
• Order limiting discovery of attorneys’ client-related information; no clear error. In a battle between attorneys over the use of the (612) INJURED telephone number and www.612injured.com, Judge Nelson overruled objections to an order by Magistrate Judge Thorson which had denied plaintiffs’ request for certain of the defendant’s client files, had limited the scope of those requests to certain non-privileged information, and had ordered the redaction of all client identifying information. Mountain Mktg. Group, LLC v. Heimerl & Lammers, LLC, 2015 WL 4529638 (D. Minn. 7/27/2015).
• Motion to enforce alleged settlement agreement denied. Judge Frank denied the plaintiffs’ motion to enforce an alleged settlement agreement, finding that an exchange of emails between counsel that referred to a settlement could not provide the basis for a settlement agreement where no specific settlement terms were proposed, and that even if a firm settlement offer had been made, it was never accepted. Olson v. Wells Fargo Bank, N.A., 2015 WL 4661984 (D. Minn. 8/5/2015).
• Third-party defendants’ default vacated; request for bond denied. Finding that the third-party defendants were at fault for their failure to respond to the third-party complaint despite ongoing settlement discussions, Judge Montgomery nevertheless set aside that default, finding that their proffered defenses “may have merit,” and that the third-party plaintiff had not demonstrated the “concrete prejudice” needed to weigh against setting aside the default. Judge Montgomery also denied the third-party plaintiff’s request that any lifting of the default should be conditioned on the posting of $500,000 bond, finding “nothing in the record to provide an appropriate guidepost for a proper bond amount.” Stilley v. Elliott Auto Supply Co., 2015 WL 4715554 (D. Minn. 8/7/2015).
• Fed. R. Civ. P. 59(e); motion to reconsider; failure to sufficiently brief issues. Judge Doty denied the plaintiff’s Fed. R. Civ. P. 59(e) motion, which he characterized as an attempt at a motion for reconsideration, noting that the plaintiff offered no new law or recently discovered facts, and finding the motion “to be nothing more than an attempt to relitigate issues previously raised, albeit with less force and detail than now presented.” Arkwright Advanced Coating, Inc. v. ML Solutions GmbH, 2015 WL 4663366 (D. Minn. 8/6/2015).
• Multiple depositions of same witness in different capacities; no abuse of discretion. Overruling objections to an Order by Magistrate Judge Rau, Judge Doty found no clear error in the magistrate judge’s decision to permit a single deposition of a Fed. R. Civ. P. 30(b)(6) for multiple entities, and to limit the deposition to three and a half hours. Bison Advisors LLC v. Kessler, 2015 WL 4509158 (D. Minn. 7/24/2015).
Law Office of Josh Jacobson
• No due process violations in denial of Bosnians’ asylum case. The 8th Circuit Court of Appeals upheld the Board of Immigration Appeals’ denial of the Bosnian petitioners’ applications for asylum and withholding of removal, finding substantial evidence supported its rejection of their due process claims. The petitioners were accorded due process. Nanic v. Lynch, No. 13-3246, slip op. (8th Cir. 7/20/2015). http://media.ca8.uscourts.gov/opndir/15/07/133246P.pdf
• Board of Immigration Appeals’ decision supported by substantial evidence but case remanded to address issue of voluntary departure. The 8th Circuit Court of Appeals affirmed the Board of Immigration Appeals’ denial of the Ethiopian petitioner’s applications for asylum, withholding of removal, and protection under the Convention Against Torture in view of questions about both his credibility and identity. The board failed, however, to address that part of his appeal relating to voluntary departure, and the case was remanded to specifically address that issue. Ademo v. Lynch, No. 13-2621, slip op. (8th Cir. 7/30/2015). http://media.ca8.uscourts.gov/opndir/15/07/132621P.pdf
• Substantial evidence in record supports finding of prior conviction in Canada. The 8th Circuit Court of Appeals held that substantial evidence in the record, including the information (indictment), trial disposition, and other documents, supported the immigration judge’s conclusion that the petitioner had a conviction in Canada for possession of cocaine for the purpose of trafficking. “We agree with the IJ that neither the Information nor the Trial Disposition standing alone would be sufficient to prove by clear and convincing evidence that Fraser had a prior Canadian conviction for possession of cocaine for the purpose of trafficking. But these documents in combination, coupled with the Canadian statutory definition of indictment, the police record, and the pardon documents, convince us that there is substantial evidence in the record to support the IJ’s conclusion.” Fraser v. Lynch, No. 14-3187, slip op. (8th Cir. 7/31/2015). http://media.ca8.uscourts.gov/opndir/15/07/143187P.pdf
• Obstruction of legal process under Minnesota statute is not an aggravated felony. The 8th Circuit Court of Appeals reversed the Board of Immigration Appeals, finding an obstruction of legal process conviction under Minnesota statute §609.50, subd. 2(2) was not a “crime of violence,” and thus not an aggravated felony requiring removal under INA §237(a)(2)(A)(iii). Ortiz v. Lynch, No. 14-2428, slip op. (8th Cir. 8/6/2015). http://media.ca8.uscourts.gov/opndir/15/08/142428P.pdf
• Forgery conviction is a crime of moral turpitude under California Penal Code. The 8th Circuit Court of Appeals held that a conviction under California Penal Code §472, criminalizing forgery and associated conduct, always includes the element of specific intent to defraud, and is thus categorically a “crime involving moral turpitude” as defined under federal immigration law. Miranda-Romero v. Lynch, No. 14-3387, slip op. (8th Cir. 8/12/2015). http://media.ca8.uscourts.gov/opndir/15/08/143387P.pdf
• Consequences resulting from guilty plea to third degree criminal sexual conduction: “May”, “could”, or “shall” lead to deportation? The Minnesota Court of Appeals affirmed the postconviction court’s finding that appellant Herrera Sanchez had received effective assistance of counsel when he pled guilty to third-degree criminal sexual conduct under Minn. Stat. §609.344, subd. 1(b). The deportation consequences were not “truly clear” in that statutory provision as the term is used in Padilla v. Kentucky, 130 S. Ct. 1473, 1483 (2010). As a result, “Counsel is required to advise a noncitizen client pleading to that charge only that a conviction ‘could’ or ‘may’ result in deportation.” Herrera Sanchez v. State of Minnesota, No. A14-1679, slip op. (Minn. Ct. App. 2015). http://mn.gov/lawlib/archive/ctappub/2015/opa141679-080315.pdf
• Customs and Border Protection to begin collecting biometric exit data. On 7/14/2015, U.S. Customs and Border Protection announced that it has commenced collecting biometric data from foreign nationals leaving the United States from Hartsfield-Jackson Atlanta International Airport with enhanced mobile devices. This data will be compared to that obtained when the same individuals entered the United States and then stored in secure data systems managed by the Department of Homeland Security. “CBP is relentless in its pursuit of new and innovative technology that will assist officers in their efforts to provide national security and efficiently facilitate trade and travel through our nation’s ports of entry,” said Office of Field Operations Assistant Commissioner Todd Owen. In the fall, testing will be expanded to Chicago, Dallas, Houston, Los Angeles, Miami, Newark, New York, San Francisco, and Washington-Dulles. The project is currently scheduled to run through June 2016. http://www.cbp.gov/newsroom/national-media-release/2015-07-14-000000/cbp-begins-testing-enhanced-handheld-mobile-device
• “Green cards” without a signature are acceptable for I-9 purposes. On 7/20/2015, USCIS announced that permanent resident cards without a signature (“signature waived”) are acceptable for Form I-9, Employment Eligibility Verification, purposes. More information about documents establishing identity and employment authorization may be found at USCIS’ website: http://www.uscis.gov/i-9-central/acceptable-documents/list-documents. http://www.uscis.gov/news/alerts/did-you-know-green-card-does-not-always-have-signature
• Trusted traveler programs expanded under trilateral agreement between the United States, Canada, and Mexico. On 8/5/2015, the Department of Homeland Security announced that on 7/10/2015, a new agreement had been reached with Canada and Mexico that created the North American Trusted Traveler network, allowing eligible travelers in the United States, Mexico, and Canada to apply for expedited screening at international airports. According to DHS Secretary Jeh Johnson, “Trusted Traveler programs are a vital tool to facilitate international travel and trade. I am pleased to work together with Canada and Mexico to lay the groundwork for expedited arrival screening for preapproved travelers from all three countries. We are committed to enhancing the travel experience through our risk-based approach to aviation security, and this expanded partnership will benefit travelers all across North America.” http://www.dhs.gov/news/2015/08/05/united-states-announces-trilateral-agreement-canada-and-mexico-expand-trusted
New security requirements added to visa waiver program. On August 6, 2015, Department of Homeland Security Secretary Jeh Johnson announced that DHS will implement new security requirements in the Visa Waiver Program. Most significant are required use of e-passports for all Visa Waiver Program travelers coming to the United States; required use of the INTERPOL Lost and Stolen Passport Database to screen travelers crossing a Visa Waiver country’s borders; and permission for the expanded use of U.S. federal air marshals on international flights from Visa Waiver countries to the United States. “The security enhancements we announce today are part of this Department’s continuing assessments of our homeland security in the face of evolving threats and challenges, and our determination to stay one step ahead of those threats and challenges.” http://www.dhs.gov/news/2015/08/06/statement-secretary-jeh-c-johnson-intention-implement-security-enhancements-visa
–R. Mark Frey
Frey Law Office
• Mechanic’s lien; pre-lien notice. Contractor did not provide pre-lien notice before performing utility and street improvements on raw land as part of a mixed-use development. Contractor subsequently retained a law firm to record a mechanic’s lien for the unpaid work. The law firm believed a pre-lien notice was unnecessary because the work fell within the pre-lien notice exception for multiple dwellings. The law firm also concluded that the contractor was unable to apportion the value of its improvements amongst the lots given the nature of the utility and street improvements it performed, and because the owner had sold some of the parcels to third parties. The law firm advised the contractor to file blanket liens on all of the parcels still owned by the contractor for the full amount of the lien, and separate blanket liens against each parcel that had been sold. The contractor commenced foreclosure and the district court ruled that the liens filed on the parcels that had been sold were invalid under Minn. Stat. §514.74 because the contractor knowingly demanded more that was justly due on those parcels. The contractor settled its remaining claims against the owner, and brought a malpractice suit against the law firm. The contractor’s malpractice law firm failed to timely file an exert-disclosure affidavit and the suit was dismissed with prejudice. The contractor then commenced a malpractice suit against the second law firm.
The district court held that the malpractice suit must fail because the contractor would have lost the underlying suit due to the fact that it failed to give pre-lien notice prior to hiring any lawyer, and therefore, the mechanic’s liens were invalid from the start. The district court found that the property was not “nonresidential in use” before the planned improvement because it was raw land not being used for any purpose, and therefore, did not fall under the exception to the pre-lien notice requirement. The court of appeals ruled that Minn. Stat. §514.011, Subd. 4c is ambiguous and the “nonresidential in use” requirement could refer to the real property or the improvement. The court of appeals held that it was the “planned-for” use of the property that determined the property’s character under Section 514.011, Subd. 4c, not the property’s existing use or nonuse prior to the improvement. Moreover, the court of appeals held that the contractor could have recorded a blanket lien on all of the parcels and that an apportionment calculation was possible. Ryan Contracting Co. v. O’Neill & Murphy, LLP, ___N.W.2d___, 2015 WL 4507937 (Minn. Ct. App. 2015).
• Title insurance; calculation of loss under policy. Lender who held a second mortgage obtained a mortgagee’s title insurance policy, which listed the first mortgage as an exception to the policy. Subsequent to the mortgage and policy, a contractor recorded a mechanic’s lien against the property that the district court determined was prior and superior to both mortgages on the property. The first mortgagee commenced a foreclosure whereby the lender redeemed the property in the amount of $2,391,551 and immediately sold the property to a third party for $3,505,175.62, of which the purchase documents indicated that the land and improvements value was $2,350,000, with the remainder of the sale price for personal property, goodwill, franchise rights, and signage. As part of the sale, the lender had to satisfy the mechanic’s lien in the amount of $265,362.71 and tendered a claim to the title insurer for that amount. The title insurer denied the claim and the lender commenced suit. The district court granted summary judgment in favor of the lender and held the lender suffered a covered loss under the title policy as a result of the mechanic’s lien.
The court of appeals reversed and remanded. The court of appeals held that in order for a junior mortgagee to sustain an actual loss under a lender’s title insurance policy, the junior mortgagee must retain equity in the mortgaged property notwithstanding any defects in title covered by the policy. If there is no equity after paying off the first mortgage, then the lender cannot suffer an actual loss when the mechanic’s lien reduced the value of the property further. Because there was evidence that the value of the property was less than the payoff of the first mortgage, the court of appeals reversed the grant of summary judgment in favor of the lender, and remanded to the district court to determine the true value of the property. Twin Cities Metro-Certified Development Company v. Stewart Title Guaranty Company, ___ N.W.2d ___, 2015 WL 4715064 (Minn. Ct. App. 2015).
• Landlord-tenant. Landlord and tenant entered into a written month-to-month lease with no expiration date. The lease required a 45-day notice of termination and did not allow notice to move out between November and February. In late November or early December 2006, tenant notified landlord that he was moving out and vacated. The tenant paid rent for November 2006, but did not pay rent for December 2006, or January or February 2007. The landlord commenced suit for the unpaid rent and for damages to the apartment. The district court concluded that the rental arrangement was a month-to-month rental arrangement not governed by any valid written lease. The district reasoned that the no-move-out clause was tantamount to an automatic renewal clause subject to a notice requirement under Minn. Stat. §504B.145, and because the landlord did not provide notice of renewal as provided in that statute, the arrangement resorted to standard month-to-month lease with a 30-day notice. The court of appeals reversed and held that the move-out clause specified winter months during which neither party could give notice to terminate, and nothing in record establishes that the move-out clause was intended to automatically renew the lease for more than two months upon the tenant’s failure to give notice to terminate. Therefore, the tenant was liable for rent through February 2007 and for costs and late fees provided in the written lease. Knight v. McGinity, ___ N.W.2d ___, 2015 WL 4715030 (Minn. Ct. App. 2015).
• Loan modification; independent duty rule. A mortgage lender assigned the loans, including the servicing rights, to a new lender after agreeing to and completing a loan modification with its borrower. The new lender was unaware of the loan modification agreement and foreclosed on the borrower’s home. The foreclosure was eventually vacated and the mortgage reinstated. Borrower brought a class action suit against the former lender and new lender claiming the former lender negligently transferred the loan to the new lender and suffered damages as a result of the unlawful foreclosure. The district court dismissed the complaint based on the independent duty rule. Because the lenders’ duty to the borrower arose from contract, the borrower could not plead a negligent breach of the contract. Without the underlying mortgage, assignment, and loan modification agreement, there would have been no duty to transfer the loan with reasonable care. Therefore, the lender had no independent duty of reasonable care when transferring the loan and the negligence claim must fail. Berger v. Nationstar Mortg. LLC, ___ F.Supp.3d ___, 2015 WL 4374126 (D. Minn. 2015).
Beisel & Dunlevy PA
• Sales tax: indirect audit, standard of review. Conga Latin Bistro is a nightclub in Minneapolis that was subject to audit for the tax periods spanning January 2007 through March 2010. Using an indirect audit, the department determined that Conga had unreported revenues and assessed additional sales, use, and entertainment taxes; penalties and interest were also assessed. An indirect audit is an audit method that relies not on a taxpayer’s books—in fact, Conga did not have books and records for the 2007 tax period—but instead on a review of accounts available as well as estimates from other sources. In this instance, the indirect audit relied on a “unit volume method” to compare Conga’s alcohol purchases to its likely alcohol sales. The Department of Revenue determined that Conga had underreported about 33 percent of its total revenues for 2008. This underreporting rate was then applied to all the tax years at issue, despite the availability of books and records for tax periods in 2008 and later. The tax court reviewed the use of the indirect audit under the standard set forth in the Minnesota Administrative Procedure Act (MAPA), and determined that the indirect audit method was acceptable for 2007, but not for the balance of the audit period. The Supreme Court reversed. The Court first addressed the standard of review and held that the tax court applied the wrong standard: Minn. Stat. 271.06, subd. 6, and not MAPA, sets forth the legal standard by which the tax court is to review orders and decisions of the commissioner. The Court noted that “in most cases the commissioner should use a direct audit” but went on to hold that the commissioner has statutory authority to use the indirect audit method to assess sales and use taxes when it is “reasonable” to do so. The court also determined that an indirect audit is not a “statistical or other sampling technique” subject to generally accepted auditing standards. The case was remanded so that the Tax Court could independently review the record to determine taxes owed. Conga Corp. v. Comm’r, No. A14-1042, 2015 WL 4637286 (Minn. 8/5/2015).
• Sales tax; statute of limitations; monthly electric bills paid by customers are taxable sales; shorter erroneous-refunds statute of limitations applies when commissioner issues a refund but later determines the refund was in error. In a recent case, the Court affirmed the substantive holding of the Tax Court that payment of monthly electric bills by a customer are taxable as sales of electricity, even when a portion of the sale is later classified as an equity contribution. The Court reversed and remanded, however, on the issue of the proper statute of limitations to apply to the assessments to recover the sales tax refunds. Minnesota statute provides that when an assessment is made because of a previously erroneous refund, the Commission has two years to make the assessment. A longer, three-and-a-half-year statute of limitations applies to general assessments. Reviewing de novo the applicable statute of limitations, the Supreme Court turned to canons of statutory interpretation to harmonize the statutes. Because a specific provision in a statute governs general provisions, the Court held that the erroneous-refund provision controls over the general-assessment provision in cases in which the erroneous-refund provision applies. The case was remanded. Connexus Energy v. Comm’r of Revenue, No. A14-1996, 2015 WL 4637319 (Minn. 8/5/2015).
• Income tax: Current deduction proper for strawberry farmer’s field-packing materials. In an issue of first impression that the court characterized as “one of considerable interest to farmers generally,” the Tax Court permitted a strawberry and vegetable farming corporation to deduct currently the cost of field-packing materials, even though the materials were not used in the year that the materials were purchased. Cash-method taxpayers are permitted to deduct expenses for supplies in the year in which the supplies are purchased, and farmers are permitted to use the cash method. In this case, the taxpayer’s farming business relied on having special field-packing material on hand. The strawberries and some of the vegetables the taxpayer produced were highly perishable, the field-packing materials were highly specialized, and the materials had to be pre-ordered so that they could be ready when the fruit was. For these reasons, the taxpayer would often purchase field-packing materials in one tax year (and would deduct the cost of those materials) even if the materials were not consumed within that year. The packing products would always be consumed during the next taxable year—the materials themselves, like the produce, were perishable. Pointing to Code section 464 and regulation section 1.162-3, the commissioner argued that the taxpayer could not deduct the cost of materials in the year purchased, but instead should be required to deduct the cost of the field-packing materials as they were consumed: “Section 464 restricts ‘farming syndicates’ from deducting ‘feed, seed, fertilizer, or other similar farm supplies’ earlier than for the year that those supplies are ‘actually used or consumed.’”
Although the parties agreed the taxpayer in this case was not a farming syndicate, each party suggested that Section 464 supported his interpretation of regulation section 1.162-3. Section 1.162-3, for its part, provides that taxpayers “carrying materials and supplies on hand should include in expenses the charges for materials and supplies only in the amount that they are actually consumed and used in operation during the taxable year for which the return is made, provided that the costs of such materials and supplies have not been deducted in determining the net income or loss or taxable income for any previous year.” In a jiu-jitsu of statutory interpretation, the court held as a matter of first impression that the field-packing materials did not fall within statutory phrase “feed, seed, fertilizer, or other similar farm supplies” of section 464. This holding undermined the taxpayer’s argument that section 464 supported an immediate deduction for the cost of the packing materials. The taxpayer had better luck, however, with regulatory section 1.62-3. Quoting the language of the section for a third time, but with emphasis differently placed, the court held that the regulatory clause “provided that” was best interpreted as “on the condition that” or “if” and “with the understanding.” This meaning of “provided that,” then, meant that the taxpayer could not deduct the cost of supplies used up in tax year 2 if the cost of those supplies was already deducted in tax year 1. Finally, the court addressed the regulatory term “on hand,” and in its final holding (also an issue of first impression), the Court held that the regulatory term “on hand” was not broadly interpreted and applies to those that are “already actually physically present or those imminently about to arrive.” The taxpayer could deduct materials for year in which it bought them. Agro-Jal Farming Enterprises, Inc. v. Comm’r, No. 15103-10, 2015 WL 4577110 (T.C. 7/30/2015).
• Partnership tax: Summary judgment denied; moving party failed to show absence of genuine issue of material fact. The court of appeals denied summary judgment to a taxpaying couple in which the taxpayer husband was part-owner of several partnerships. The commissioner had issued an Order of the Commissioner/Notice of Change in Sales and Use Tax against four entities partially owned by taxpayer husband. Because the entities were pass-through, a portion of the flow-through income was attributed to taxpayer husband, and the couple was assessed over $800,000 in additional income tax, penalties, and interest. The couple paid the assessment in full and subsequently filed amended returns for the years at issue. After the couple paid the assessment, and in connection with a separate bankruptcy proceeding, the commissioner issued a Notice of Determination on Appeal in connection with the tax liability for one of the entities partially owned by taxpayer husband. Citing that notice in this dispute, the taxpayers moved for summary judgment and requested an immediate refund of additional taxes, penalties and interest. The court denied the motion, reasoning that the taxpayers had not “provid[ed] any legal support or analysis for the assertion that the order [relating to the bankruptcy case] is conclusive in this case.” The court then granted in part the commissioner’s motion to strike certain exhibits attached to the affidavit of the taxpayers’ attorney. Gelb v. Comm’r of Revenue, No. 8625-R, 2015 WL 4458973 (Minn. Tax Ct. 7/20/2015).
• Estate tax: Court specifies computation of remainder interest for NIMCRUTs. A decedent, Mr. Schaefer, established two irrevocable charitable remainder trusts; in particular, he established net income charitable remainder unitrusts (NICRUTs). The trusts were designed so that each of Mr. Schaefer’s two sons would receive distributions during the child’s life or a term of years, with the remainder going to charity. The IRS and the estate disputed the appropriate distribution amount to use in calculating the values of the charitable remainder interests. Recognizing that the competing provisions were ambiguous, the court turned to legislative history and administrative guidance to find for the Service. The court determined that value of NIMCRUTs’ remainder interest was to be calculated using the greater of 5 percent or fixed percentage stated in trust instrument. Applying the rule to the stipulated facts in this case, the estate was not entitled to a charitable contribution deduction. Estate of Schaefer v. Comm’r, No. 13183-11, 2015 WL 4540539 (T.C. 7/28/2015).
Personal income tax: Payments to widow of former business associates not business expenses; other deductions disallowed. Taxpayer couple appealed the tax court’s denial of a deduction for amounts paid to the widow of a former business associate; the taxpayer claimed the payments were deductible as business expenses because they were made to protect his business reputation. The payments had begun when the taxpayer owned the company for whom the late husband had worked. The taxpayer then sold his company via an employee stock ownership plan, and following the transfer, the company declined to continue making payments to the widow. The board of directors concluded that the death benefit was the taxpayer’s personal obligation. The 8th Circuit rejected the taxpayer’s argument that the amounts were deductible as business expenses. The taxpayer failed to provide any evidence that the payments were in furtherance of his business reputation. The court affirmed the disallowance of other claimed deductions. Zavadil v. Comm’r, No. 14-1053, 2015 WL 4285265 (8th Cir. 7/16/2015).
• Corporate income tax: Regulation invalidated; arbitrary and capricious. In an extensive opinion, the tax court (Judge Marvel) invalidated regulation section 1.482-7(d)(2), which the Department of the Treasury issued in 2003 and which requires participants in qualified cost-sharing arrangements to share stock-based compensation costs to achieve an arm’s-length result. The petitioner was a group of consolidated corporations with certain risk and cost-sharing agreements. The commissioner issued notices of deficiencies to the group for several tax years. Code Section 482 authorizes the commissioner to allocate income and expenses among related entities to clearly reflect income. The regulations to section 482 have long incorporated an “arm’s-length” standard—in other words, the transaction is tested against the standard of whether it is consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances. In 1986, Congress added the “commensurate-with-income standard” to Section 482. Treasury was then tasked with determining the relationship between the standards and determined that the two standards were to work consistently. In 2003, Treasury issued a notice of proposed rulemaking on proposed amendments to the cost-sharing regulations. In 2003, the final rule was issued.
In a thorough discussion, the tax court held first that the rule was legislative rule subject to notice and comment requirements under Administrative Procedure Act (APA). The court then held that the commensurate-with-income standard, as interpreted by Treasury, did not provide sufficient basis for the rule, and that the rule did not satisfy State Farm’s “reasoned decision-making” standard because it lacked any basis in fact, Treasury failed to articulate rational connection between facts found and rule, and Treasury failed to respond to significant comments submitted by commentators before promulgating rule. The court concluded, citing a circuit court opinion, that “Treasury’s “ipse dixit conclusion, coupled with its failure to respond to contrary arguments resting on solid data, epitomizes arbitrary and capricious decision-making.” Altera Corp. & Subsidiaries v. C.I.R., No. 6253-12, 2015 WL 4522662 (T.C. 7/27/2015) (internal citation omitted).
• Income tax: Cancellation of indebtedness income and limits on net operating loss, case of first impression: A group of related entities that filed consolidated tax returns petitioned for bankruptcy. In the proceeding, the group realized cancellation of indebtedness (COD) income. COD income is not included in gross income when the COD occurs during a bankruptcy proceeding. However, the Code provides that when COD income is excluded from gross income, certain tax attributes must be reduced. The court relied on the Supreme Court’s opinion in United Dominion v. United States, 532 U.S. 822 (2001), to determined that the proper net operating loss subject to reduction under section 108(b)(2)(A) is the group’s consolidated net operating loss. Neither the Code nor the consolidated return regulations provided authority for affiliated group to allocate and apportion CNOL to individual group members for section 108(b)(2)(A) purposes. Marvel Entm’t v. Comm’r, No. 12113-13, 2015 WL 4451046 (T.C. 7/21/2015).
• Welfare benefit plan found to be split-dollar life insurance arrangement: penalties upheld. Attorney Ronald H. Snyder and two fellow attorneys established the Sterling Plan as a way for employers to fund and receive greater benefits than pension plans allowed. The Sterling Plan was designed to operate as a single welfare benefit plan, which is an aggregation of separate multiple single employer welfare benefit plans under section 419(e). The commissioner assessed deficiencies relating to the plan against a number of taxpayers. In a consolidated opinion to which parties in approximately 40 other cases pending had agreed to be bound, the tax court issued a series of holdings supporting the commissioner. The court held that for certain taxpayers, the life insurance arrangement in the plan was subject to federal taxation as split-dollar life insurance arrangements; the court denied deductions in some instances, and in others held that corporate taxpayer’s payment to the plan was constructive distribution and therefore taxable. The court upheld penalties. Our Country Home Enterprises, Inc. v. Comm’r, No. 11520-11, 2015 WL 4186662 (T.C. 7/13/2015).
• Value of identity protection services not included in income. In IRS Announcement 2015-22, the Service clarified that it will not assert that an individual whose personal information may have been compromised in a data breach must include in gross income the value of the identity protection services provided by the organization that experienced the data breach. Additionally, the IRS will not assert that an employer providing identity protection services to employees whose personal information may have been compromised in a data breach of the employer’s (or employer’s agent or service provider’s) recordkeeping system must include the value of the identity protection services in the employees’ gross income and wages. The IRS will also not assert that these amounts must be reported on an information return (such as Form W-2 or Form 1099-MISC) filed with respect to such individuals. This announcement does not apply to cash received in lieu of identity protection services, or to identity protection services received for reasons other than as a result of a data breach, such as identity protection services received in connection with an employee’s compensation benefit package. This announcement also does not apply to proceeds received under an identity theft insurance policy; the treatment of insurance recoveries is governed by existing law.
• Minnesota Department of Revenue receives award. The Department was awarded a State Innovation Award for its work on its nation-leading Electronic Certificate of Real Estate Value (eCRV). The award was presented by the University of Minnesota’s Humphrey School of Public Affairs and the Bush Foundation, and recognizes the agency’s new online system for processing and cataloging real estate transactions in Minnesota. Minnesota is among the first states in the nation to offer the certificate online.
• Revenue reminds parents and guardians of Education Tax Credit. Most school supplies could qualify for K-12 tax benefits on Minnesota returns. Two tax benefits help Minnesota families pay expenses related to their child’s education: the refundable K-12 education credit (income limits apply) and the K- 12 subtraction (no income limits). Both programs reduce the tax parents pay and could provide a larger refund when filing a 2015 Minnesota income tax return. To qualify, parents must have purchased educational services or required materials during 2015 to assist with their child’s education. The child must also be attending kindergarten through 12th grade at a public, private, or home school and meet other qualifications. Remember to save your receipts to claim the credit or subtraction.
• We’re #19. According to the Tax Foundation, Minnesota ranks 19th of the 50 states in effective tax rates on owner-occupied housing. The Tax Foundation explains effective tax-rates on owner-occupied housing as “the average amount of residential property tax actually paid, expressed as a percentage of home value.” New Jersey ranks first, and our neighbor to the east, Wisconsin, is fifth.
Hamline University School of Law
TORTS & INSURANCE
• Insurance; excess UIM benefits. Plaintiff was one of 19 individuals injured in a motor vehicle accident involving a school bus that was struck by an at-fault vehicle. The at-fault vehicle had a liability limit of $60,000 per accident and the school bus had UIM limits of $1 million. Both policies tendered their limits to the district court. Plaintiff’s damages were valued at $140,000, but because of the number of individuals injured, plaintiff’s pro rata share of the policy proceeds was $35,144.03. Plaintiff then sought to recover $65,456 in excess UIM from defendant insurer, which insured plaintiff’s family’s vehicle for up to $100,000 in UIM coverage. The insurer denied plaintiff’s claim for excess UIM benefits because its coverage ($100,000) did not “exceed” the UIM-coverage limit of the bus company’s insurance ($1,000,000). The district court agreed with the insurer and granted its motion for summary judgment. The court of appeals affirmed.
The Minnesota Supreme Court reversed the decision of the district court and court of appeals. The Court concluded that the phrase “coverage available” in Minn. Stat. §65B.49, subd. 3(a)(5) was subject to two reasonable interpretations. First, as the insurer argued, the term could mean “the policy limit of the [occupied] vehicle’s UIM coverage” so that plaintiff would be unable to recover excess UIM benefits. Second, as plaintiff argued, the term could “mean the amount recovered by the insured person from the [occupied] vehicle’s UIM policy” so that plaintiff would be entitled to recover excess UIM benefits because the “limit of liability for like coverage” ($100,000) exceeded the “coverage available to” him ($34,543.70). Therefore, the Court held the statute was ambiguous and considered the intent of the legislature in passing the statute. The Court held plaintiff’s proposed interpretation most furthered the legislature’s purposes “by compensating accident victims while also limiting their claims to the amounts of coverage selected by the insured.” Therefore, the Court concluded that the term “‘coverage available’ means the benefits actually paid to the insured under the coverage provided by the occupied vehicle’s policy.”
Justice Stras wrote a strong dissent criticizing the reasoning of the majority. Justice Stras reasoned that the statutory term should be read as a whole so that the phrase “the limit of liability of the coverage available” would unambiguously refer to the policy limit of the occupied vehicle’s UIM coverage. Sleiter v. Am. Family Mut. Ins. Co., No. A13-1596 (Minn. 8/5/2015). http://mn.gov/lawlib/archive/supct/2015/OPA131596-080515.pdf
Bassford Remele, A Professional Association