Articles
Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

Notes & Trends – February 2016

BANKRUPTCY
JUDICIAL LAW

Bankruptcy court’s findings on non-dischargeable student loan debts upheld. On remand from a prior appeal to determine the debtor’s disposable income to service certain student loan payments, the bankruptcy court held that her monthly disposable income was $170.30, from which it held she could make payments on four of her student loans without undue hardship. Debtor appealed, arguing the bankruptcy court made clearly erroneous findings as it did not take into account her reduced income due to loss of one of her jobs after a cut-off date set by the bankruptcy court but before its findings were issued, the increase of certain expenses and reduction by the court of her miscellaneous expenses. The bankruptcy court had reviewed her income and expense information over the most recent 12-month period as directed on remand. In affirming the decision and methodology of the bankruptcy court, the BAP noted that “[a] decision on the dischargeability of student loan debt will nearly always be akin to a judicial version of ‘Whack-A-Mole’ because a debtor’s income and expenses are rarely static. Life is like that.” The BAP held that the bankruptcy court properly reviewed the complete year of income and expenses, and did not have to amend its judgment to reflect continued changes in debtor’s circumstances. In re Chelsea Ann Conway, No. 15-6029 (8th  Cir. BAP, 12/21/2015).

Debtor denied her discharge under Section 727 for making a false oath or account after failing to schedule a number of bank accounts, transfers, and assets. Debtor failed to disclose numerous bank accounts, the transfer of an automobile, a $23,000 payment on her mortgage within 90 days of filing, and her interest in several businesses. The bankruptcy court found these omissions amounted to a reckless indifference to the truth. Debtor appealed the denial of her discharge, claiming the bankruptcy court erred in finding she had fraudulent intent. The BAP held that the bankruptcy court’s determination that debtor had knowingly and fraudulently made a false oath or account under 11 U.S.C. §727(a)(4)(A) is a factual determination reviewed for clear error, quoting In re Bauder, 33 B.R. 828 (8th  Cir. BAP 2005), “[t]o be clearly erroneous, a decision must strike us as more than just maybe or probably wrong; it must strike us as wrong with the force of a five-week old, unrefrigerated dead fish.” Debtor admitted that she did a “poor job” filling out her schedules, but argued that the issue was whether she made the omissions for the specific purpose of defrauding her creditors. She asserted that the items omitted were generally of minimal value or would not have been part of the estate. The BAP noted that a debtor had a duty to provide a “complete picture of her assets and liabilities.” It observed that debtor was a bookkeeper for several businesses and failed to disclose assets of significant value. The BAP upheld the decision of the bankruptcy court. In re Norma J. Cecil, No. 15-6026 (8th  Cir. BAP, 12/28/2015).

– Patrick C. Summers

DeWitt Mackall Crounse & Moore S.C.

Commercial and Consumer Law
Judicial Law

Madden update. In the December 2015 issue of this publication under the heading “Less Not More,” I discuss and criticize the 2nd Circuit’s recent Madden case, which acted as a bombshell for securitization transactions in denying preemption for credit card receivables sold by a national bank to a debt collector. The defendants in Madden filed for a rehearing which was denied by the Second Circuit, and have filed a petition for certiorari with the U.S. Supreme Court, requesting the court decide whether §85 of the National Bank Act does or does not preempt state usury laws—that is, does §85 continue to apply to loans made by a national bank after the bank has transferred the loans to another entity? The petition cites an 8th Circuit 2000 decision, Krispin v. May Department Stores Co., 218 F. 3d 919 (8th  Cir. 2000), which ruled the other way from the Second Circuit. Action by the Supreme Court is not expected before February. Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).

Divisions of opinion. The jurisdictional arm grows ever longer. For example, in Quik Payday, Inc. v. Stork, 549 F. 3d 1302 (10th  Cir. 2008), cert. den. 2009 WL 666434 (U.S. 2009), an out-of-state lender through the internet made a loan to a Kansas resident and the Kansas agency that enforces their law determined this did not violate either the commerce or due process clauses and the 10th Circuit agreed. Then, in State of Minnesota v. Integrity Advance, LLC, No. A13-1388 (Minn. Sup. Ct. 2015), which involved a Delaware LLC operating as an online payday lender, the lender charged Minnesota borrowers interest rates in excess of those allowed under Minnesota law, and was not licensed as a lender in Minnesota. The Minnesota Supreme Court followed the 10th Circuit. The loans were made pursuant to online loan applications, the borrowers were called at their homes or employment, and their banks also were contacted so their paychecks were deposited to their bank accounts as were the loan proceeds and from those deposits payments were withdrawn. The lender Integrity argued that it was protected by the commerce and due process clauses and cited Midwest Title Loans, Inc. v. Ripley, 616 F. Supp. 2d 897 (S.D. Ind. 2009), aff’d sub nom. Midwest Title Loans, Inc. v. Mills, 593 F.3d 660 (7th  Cir. 2010), holding Indiana’s attempts to regulate credit agreements between an Illinois lender and Indiana residents violated the commerce clause.

The Minnesota Supreme Court, however, distinguished the Mills case on the basis that their borrowers had to sign the loan agreements, receive the proceeds, transfer the collateral, and the lender receive payment in Illinois, so that Indiana sought to regulate commerce that was “wholly” extraterritorial, while in Integrity Advance the extension of payday loans to Minnesota residents did not occur wholly outside Minnesota’s borders. That being so, “extraterritorial” regulation was not prohibited by the commerce clause or the due process clause.

It seems clear that the mere fact a person does not have a physical presence in a state (“bricks and mortar”) but conducts its business by telephone and mail (electronic or otherwise), does not necessarily control whether the company is subject to a state’s jurisdiction. Considering that, and, as the court stated, Minnesota law would have only a “negligible” effect on commerce and did not control the terms on which companies lend money in other states, the court ruled the Minnesota law did not excessively burden interstate commerce.

That may be debatable, but it clearly is not the whole story as the decision’s result not only subjects the lender to Minnesota law, which does not allow Delaware rates, which may be necessary to do business, but it would seem to also subject a lender to Minnesota licensing and all that goes with it as well, and also to the same regulation for any other state that follows the decision. Thus, for the observation by the court to be realistic, and not constitute such a burden on commerce that the lender cannot continue to profitably do business in any state, paying the cost of regulation in Delaware and Minnesota and where also it may do business, would seem clearly impossible. The courts need to think this matter through completely.

Are there other ways for interstate internet lenders to operate? Consider Maryland Commissioner of Financial Regulation v. CashCall, Inc., No. 1477 (Md. Ct. Spec. App. 2015). The case involved a California corporation that arranged more than 5,000 loans for Maryland consumers that were issued by two federally insured out-of-state banks at rates in excess of those allowed in Maryland. By arrangement the California corporation then purchased the loans and serviced them. The Maryland regulatory agency concluded the California company had violated Maryland law and imposed a penalty. The Circuit Court for Baltimore City reversed the commissioner’s order, and an appeal followed.

The California corporation advertised and directed potential customers to its website for a loan application. There also was a telephone number to call. Completed applications were forwarded to the two banks. When approved, the proceeds were disbursed less an origination fee, the California corporation would buy the loan, and payments would be made to it.

The court held that while federally insured depository institutions, whether federal or state chartered, can charge the interest rate in its home state to borrowers across state lines, under Maryland law a credit services business is prohibited from assisting a consumer to obtain an extension of credit at a rate of interest which, except for federal preemption of state law, would be prohibited under state law. The court then, after an interpretive struggle, ruled that the California corporation qualified as a credit services business and affirmed the order of the commissioner, but never discussed whether Maryland had jurisdiction over the California corporation, but perhaps it would have found that too. More often the role of the Califonia corporation is played by a local company over which there clearly is jurisdiction. Thus, even absent any jurisdiction over an ultimate lender, if there is jurisdiction over one who “facilitates” the loan, “rent a lender” will not work to avoid the protective state’s law. However, given the Madden case discussed, supra, whether preemption might carry over to protect the “facilitator” remains an open question.

Nonetheless, there are regulatory limits in this context. In Costos v. Bank of America, N.A., 74 Fed. Supp. 3d 558 (E.D.N.Y. 2015) (and the similar case of Andrichym v. TD Bank, N.A., 2015 U.S. Dist. LEXIS 344802 (E.D.Pa. 2015)), a consumer received a payday loan through an application over the internet at an APR of 1200%. Some two months later the lender, pursuant to agreement, initiated an ACH debit transaction for interest due against the consumer’s checking account. This and other debits created overdrafts for which the consumer was charged fees. The consumer then brought a putative class action against the bank on several theories.

None of the theories were upheld. There was no breach of the deposit contract despite the many warnings by regulators about this practice and the incorporation of NACHA rules in the agreement which also raised alerts about facilitating collection by this means of such loans; no breach of good faith and fair dealing as the debits, even if arguably illegal, were authorized; no unconscionability as that theory was only a shield; no conversion as the deposits belonged to the bank; and no unjust enrichment or UDAP claim as the deposit agreement precluded the first and there was no concealment or misrepresentation as to the second.

Two other limitations were recognized in Everette v. Joshua Mitchem, et. al., Case No. 1:15-cv_01261 (Dist. Md. 2015), where the lender was a wholly owned tribal lending company formed under tribal law to raise revenue for tribal purposes and thus was immune from suit by reason of sovereign immunity for off-reservation commercial activity. A similar case is Great Plains Lending, LLC, et al. v. Connecticut Department of Banking, CV15-6028096 (Super. Ct. New Britain 2015). Whether this analysis will survive federal regulatory authority by the Consumer Financial Protection Bureau (CFPB) remains to be seen, however, as tribes are subject to federal law even if not generally to state law.

– Fred Miller

Retired G.L. Cross Research Professor,

University of Oklahoma

CRIMINAL LAW
JUDICIAL LAW

Aiding and abetting: For valid guilty plea to aiding after the fact, principal offender need not be convicted of underlying offense. Appellant pleaded guilty to aiding an offender after the fact. Appellant bought a gun from Shufford, who later asked to use the gun to commit a robbery. Shufford later returned the gun to appellant, told him “he had to slump the guy,” and showed him a dead man in a car. The gun was later found in appellant’s possession and identified as the murder weapon. After a jury trial, Shufford was found not guilty, and appellant moved to withdraw his guilty plea. The district court denied his motion. On appeal, appellant argues the district court’s denial of his motion was contrary to both the fair-and-just and manifest-injustice standards for the withdrawal of a guilty plea.

A manifest injustice occurs when a guilty plea is not valid, that is, not accurate, voluntary, and intelligent. Appellant argues his factual admissions were inadequate, because he could not know that a crime was committed if Shufford was found not guilty of the first-degree murder. The fair-and-just standard requires the court to consider the reasons offered to support the withdrawal of a guilty plea and the prejudice to the state should the plea be withdrawn. The sole reason provided by appellant for withdrawal of his plea was that he “faces punishment for an after-the-fact role in a murder that a jury determined could not be proved beyond a reasonable doubt.”

Held, the district court did not abuse its discretion in denying appellant’s motion to withdraw his guilty plea. The statute under which appellant was convicted, Minn. Stat. §609.495, subd. 3, states that “[w]hoever intentionally aids another person whom the actor knows or has reason to know has committed a criminal act, by destroying or concealing evidence of that crime,… [or] receiving the proceeds of that crime… is an accomplice after the fact.” The statute requires that someone commit a criminal act, not that a person be convicted of a criminal act. The facts to which appellant admitted when entering his plea described the commission of first-degree murder by Shufford and demonstrated that appellant had reason to know Shufford committed that crime. The court justifies its holding by citing Minnesota Supreme Court cases involving charges of aiding and abetting the underlying crime and finding that the acquittal of a principal offender does not affect the conviction of a defendant charged with aiding and abetting the principal. The district court is affirmed. State v. Adaiah Deontraie Townsend, Ct. App. 12/7/15.

Controlled substances: No rebuttable presumption of contamination for controlled substances handled by St. Paul Police Crime Lab. Appellant was charged with aiding and abetting first-degree sale of a methamphetamine. During his court trial, he objected to the admission of BCA test results confirming the substance was methamphetamine, arguing that the results were unreliable because the substance may have been contaminated while in the custody of the St. Paul Police Crime Lab, which was investigated for deficiencies in its quality assurance controls. The substance was tested first by the crime lab and then again by the BCA, after the state requested additional testing. The district court rejected appellant’s argument, and appellant was convicted. The court of appeals affirmed. Before the Minnesota Supreme Court, appellant asked the Court to adopt a rebuttable presumption of contamination for controlled substances handled by the crime lab, based on either a right to substantive due process or the court’s inherent judicial authority.

The Supreme Court declines to adopt a presumption that all evidence processed through the crime lab is contaminated unless the state can prove the absence of contamination. With respect to action by the state, substantive due process prevents the government from engaging in conduct that shocks the conscience. Appellant argues that processing evidence through a laboratory that operated without policies, procedures, checks, and controls shocks the conscience, and equates the likelihood of contamination at the crime lab with the use of unnecessarily suggestive eyewitness identification procedures that create a substantial likelihood of irreparable misidentification, which are prohibited by substantive due process.

The court points out that there was no evidence of bad faith, malicious intent, or intentional misconduct by the crime lab or its employees. To the contrary, the district court found that proper measures were taken in handling the evidence in this case. Because there is no evidence of harmful intent or blatantly egregious behavior, or a “substantial likelihood” of contamination, the court finds that appellant’s right to due process does not compel the adoption of a presumption of contamination of the substances handled at the crime lab.

The Court also declines to adopt such a presumption pursuant to its supervisory powers to ensure the fair administration of justice. The Court finds that the issue does not present statewide implications, as it is limited to a single laboratory, there is no evidence to suggest the crime lab persisted in substandard operation despite previous warnings from the court, and the Legislature has taken action to address the concerns of substandard crime lab operations. State v. Richard Ellis Hill, Sup. Ct. 12/9/15.

Restitution: Restitution order six years after sentencing proper where Minn. Stat. §611a.04, subd. 1(b), requirements met. Appellant was convicted of first-degree premeditated murder in 2008, and the district court reserved the issue of restitution for 30 days after sentencing. The state filed a request for restitution within this time, but the court did not take any action. In 2014, the district court granted the restitution request and ordered appellant to pay $6,500. The restitution request was properly served upon appellant’s attorney of record. The restitution statute does not set a deadline for the district court to exercise its authority to order restitution, and all of Minn. Stat. §611A.04, subd. 1(b)’s requirements for the issuance of a restitution order after a sentencing hearing are met here: (1) offender is on probation, committed to the commissioner of corrections, or on supervised release; (2) sufficient evidence of a right to restitution has been submitted; and (3) the true extent of the victim’s loss was not known at the time of the sentencing hearing. State v. Kenneth E. Anderson, Sup. Ct. 12/9/15.

Therapist-client privilege: There is no “threats” exception to the therapist-client privilege. During an anger management therapy session, respondent became upset and made threatening statements about D.P. His therapist concluded that respondent’s statements triggered her duty to warn under Minn. Stat. §148.975, and she reported respondent’s statements to her supervisor, D.P., and the police. Respondent was thereafter charged with terroristic threats. Respondent moved to exclude at trial any statements by his therapist, and objected to his therapist’s testimony during the trial. The district court denied respondent’s motion and overruled his objections, finding that the therapist-client privilege does not apply to statements of imminent threat of harm. Respondent’s therapist and D.P. testified about the statements respondent made to his therapist. The jury found respondent guilty. On appeal, he argued that his therapist’s testimony was inadmissible under the therapist-client privilege. The court of appeals reversed his conviction, and the state petitioned the Supreme Court for consideration of (1) whether respondent timely objected to his therapist’s testimony under Minn. R. Crim. P. 10.01, subd. 2, (2) whether the therapist-client privilege is subject to a “threats exception,” and (3) whether the therapist-client privilege extends to the testimony of third parties.

Minn. R. Crim. P. 10.01 states that “[d]efenses, objections, issues, or requests that can be determined without trial on the merits must be made before trial by a motion to dismiss or to grant appropriate relief. The motion must include all defenses, objections, issues, and requests then available. Failure to include any of them in the motion constitutes waiver…” However, determining whether a therapist’s testimony is privileged necessarily involves a fact-dependent inquiry that may require a trial on the merits, Rule 10.01 does not require the preemptive objection to testimony based on the assertion of a privilege.

The therapist-client privilege statute contains two specific exceptions, which allow testimony by a therapist in cases involving the neglect or abuse of a minor, but does not contain an exception for threatening statements. The court rejects the state’s argument that a “threats exception” should be adopted in light of Minn. Stat. §148.975, which places a duty to warn on psychologists. This statute establishes a duty to warn “when a client or other person has communicated to the licensee[, including a psychologist,] a specific, serious threat of physical violence against a specific, clearly identified or identifiable potential victim.” The duty is discharged “if reasonable efforts… are made to communicate the threat.” The duty to warn statute says nothing about a psychologist’s duty of confidence to his/her client once the duty is discharged. The privilege statute is an evidentiary statute that address under what circumstances therapists are competent to testify about matters covered by the privilege—it creates an exception to the general rule that every witness is presumed to be competent to testify in court. As in this case, a psychologist can both comply with the duty to warn and still be incompetent to testify in court about the information the psychologist has disclosed.

The court finds that the therapist-client privilege does not extend to third-party testimony about confidential information acquired by a therapist while attending a client, and, therefore, D.P.’s testimony about respondent’s statements was not subject to the privilege. However, the court cannot conclude that the district court’s error in allowing the therapist’s testimony was harmless, even with D.P.’s testimony regarding respondent’s statements. D.P.’s testimony was far less extensive than the therapist’s testimony, which provided key evidence that respondent acted recklessly with respect to causing terror. Respondent’s conviction is reversed. State v. Jerry Expose, Jr., Sup. Ct. 12/9/15.

Service: Rebuttable presumption applies that mail properly addressed and sent with prepaid postage is duly received by addressee. In 2013, respondent was charged with two counts of first-degree criminal sexual conduct after respondent moved from Minnesota to California. The district court mailed the summons and complaint to respondent at his California address, and the documents were not returned as undeliverable. Respondent failed to appear for his first appearance, and the district court issued a warrant. In 2015, he was extradited to Minnesota, after which respondent moved to dismiss the charges, alleging a violation of his right to a speedy trial. Five days later, he made a speedy trial demand. The district court dismissed the charges on speedy trial grounds, finding that the state did not present evidence that respondent actually received the summons and complaint. The state appeals.

Held, respondent’s right to a speedy trial was not violated. A four-factor test is used to determine whether the right to a speedy trial has been violated: (1) length of the delay, (2) reason for the delay, (3) whether and when the defendant asserted his right to a speedy trial, and (4) prejudice to the defendant caused by the delay. Here, there was a 21-month delay, and the state knew where respondent was residing during that time, but did not attempt to apprehend him. However, the state did not act intentionally to delay a trial in this case. More importantly, respondent presumably knew about the charges against him long before his arrest in 2015, after the court mailed a summons and complaint to his address in California. Minn. R. Crim. P. 3.03, subd. 3, permits service of a summons on a defendant by mailing it to the defendant’s last known address. The court of appeals also adopts the presumption, applied by the United States Supreme Court in another criminal case, “that proof of a letter properly directed was placed in a post office creates a rebuttable presumption that it reached its destination in usual time and was actually received by the person to whom it was addressed.” Hagner v. United States, 285 U.S. 427, 430 (1932). Respondent has not rebutted this presumption.

In addition, while it is the state’s duty to bring a defendant to trial, it is the defendant’s responsibility to assert his speedy trial right, and failure to do so is relevant to the question of whether that right was violated. Respondent did not assert his right to a speedy trial until 23 months after he was notified of charges. Finally, although some audio recordings were lost by the state, the record does not establish that they were lost after respondent was charged, so it cannot be said they were lost to due to the post-accusation delay, and any other prejudice respondent may have suffered was mitigated by his acquiescence to the delay. The district court’s order dismissing the charges is reversed. State v. David Ernest Osorio, Ct. App. 12/14/15.

n Assault: Assault of peace officer; off-duty peace officer with probable cause for arrest is acting in capacity as peace officer and executing duty imposed by law. Following a jury trial, appellant was found guilty of fourth-degree assault of a peace officer. Appellant visited a friend in the hospital, when a hospital peace officer (an off-duty St. Paul Police Officer employed by the hospital) was called to her friend’s hospital room, because the visitors were rude, loud, disruptive, and violating visiting policies. Appellant was escorted to the lobby, when she rushed toward the officer, grabbed him, and ripped his uniform. Appellant also scratched the officer’s face, drawing blood. After the officer pushed appellant away, she charged him again, and the officer maced her before arresting her for assault. On appeal, appellant argues there was insufficient evidence to support her conviction, because the state failed to prove the officer was either executing a lawful arrest duty or executing any other duty imposed by law.

One element of fourth-degree assault of a peace officer is that the officer was executing a lawful arrest or executing any other duty imposed by law. Peace officers’ duties include the prevention and detection of crime, the enforcement of criminal laws, and the exercise of professional judgment legitimately calculated to protect the health, safety, and general welfare of the public. Appellant was escorted out of her friend’s hospital room because she was disturbing the peace and engaging in disorderly conduct, and the officer acted to protect the health and safety of other patients and prevent a breach of the peace, thereby executing a duty imposed by law.

Under State v. Childs, 269 N.W.2d 25 (Minn. 1978), an off-duty peace officer working as a security officer may arrest an individual, as if the peace officer was on duty, if the officer has probable cause to believe the individual committed a crime. Here, the officer had probable cause to believe appellant committed a number of crimes, based on the information he received from hospital staff and appellant’s conduct once he attempted to escort her to the lobby. Held, a peace officer working as a privately employed security officer who has probable cause to arrest an individual is “executing a duty imposed by law” under the fourth-degree assault of a peace officer statute and acting in his capacity as a peace officer. Appellant’s conviction is affirmed. State v. Lakeisha Noal Ivy, Ct. App. 12/14/15.

Voir dire: No review of district court’s failure to strike juror for cause sua sponte when challenge to juror expressly waived. In his appeal from his conviction for criminal sexual conduct, appellant argues, among other things, that the district court erred by not dismissing two prospective jurors for cause, because their answers on the written questionnaire and to questions during voir dire revealed biases. After questioning all prospective jurors, appellant’s trial counsel and the prosecutor passed all prospective jurors for cause.

The Minnesota Supreme Court’s holding in State v. Thieme, 160 N.W.2d 396 (Minn. 1968), retains its validity, even though the opinion predates the promulgation of the rules of criminal procedure, and is binding in this case. In Thieme, the court did not consider the appellant’s biased-juror argument because the defendant chose not to challenge the juror before the district court. This rule is consistent with the rules of criminal procedure, Minnesota case law, the rule that the district court has no duty to dismiss a juror for cause sua sponte, and federal case law.

Here, appellant’s trial counsel’s statement at the conclusion of voir dire, “I pass for cause, Your Honor,” indicated that he chose to make no challenge to the two prospective jurors in question. The statement relieved the district court of any obligation to dismiss the jurors for cause sua sponte, and reflected an intentional relinquishment or abandonment of the right to challenge these two prospective jurors. Therefore, the court of appeals refuses to consider Appellant’s biased-juror arguments. The court also concludes that appellant’s trial counsel did not provide ineffective assistance by not seeking to remove the jurors. State v. Larry Leo Geleneau, Jr., Ct. App. 12/21/15.

Search & seizure: No seizure of vehicle through use of squad spotlight and when vehicle not blocked. A police officer decided to investigate after observing a Jeep drive into a parking lot of a strip mall that was closed. He pulled up several feet behind and to the left of the Jeep, driven by appellant, and illuminated the area with his squad’s spotlight. He did not use the emergency lights or loudspeaker. He ultimately arrested appellant for DWI and her driver’s license was revoked based on her refusal to submit to a breath test. Before the district court, she argued that the Jeep was seized when the officer parked behind it, and the seizure was not supported by reasonable articulable suspicion, but the district court found that no seizure had occurred and sustained the revocation of her license.

Held, no seizure of appellant’s Jeep occurred. Police must have a reasonable suspicion to seize a person, but a seizure occurs when the officer’s actions “indicate to a reasonable person that she is not free to leave.” Here, appellant’s Jeep was not blocked by the squad car, so Appellant could have pulled away. In addition, the court has previously held that the use of a squad spotlight to locate a vehicle is not a seizure. Crawford v. Comm’r Pub. Safety, 441 N.W.2d 837 (Minn. App. 1989). Although the officer in this case kept the light illuminated while he approached the Jeep, unlike in Crawford, no reasonable person would feel significantly more or less free to leave depending simply on whether or not the officer had turned the spotlight off before approaching. Unlike emergency lights, a spotlight or flashlight, without being accompanied by some verbal command, is not reasonably or commonly interpreted as a command to stop. Finally, a similar stop during daylight hours (without the need for the spotlight) would not constitute a seizure. Rita Dolores Illi v. Commissioner of Public Safety, Ct. App. 12/21/15.

Postconviction: Same test for government interference with witness applies in criminal trial and postconviction contexts. In this case of first impression, the Supreme Court considers an argument that a government actor interfered with a witness before or during a postconviction evidentiary hearing. The test in the context of a criminal trial is whether the defendant has proved that (1) a government actor interfered with a defense witness’s decision to testify, (2) the interference was substantial; and (3) the defendant was prejudiced by the conduct. The Supreme Court adopts this same test in a postconviction setting.

Here, appellant failed to prove elements (1) and (2). The court relies on the postconviction court’s findings that the state did not substantially interfere with two witnesses’ decision to testify at the postconviction hearing. Specifically, the fact that the state entered into a plea agreement with one witness that purported to restrict her from testifying in appellant’s case did not amount to substantial interference, because the postconviction court deemed the provision in the plea agreement regarding the witness’s testimony unenforceable. The witness voluntarily thereafter invoked her 5th Amendment privilege and freely chose not to testify. The second witness was interviewed outside the presence of an attorney, and the state informed the witness of the consequences of perjury. However, counsel was not appointed for this witness until after the interview took place, so the state made no ethical violations. In addition, the state discussed perjury with the second witness because it had a strong belief that he would provide false testimony, the witness stated on the record that he did not choose to withhold his testimony because of fear of prosecution for perjury, and he asserted his 5th Amendment privilege after consulting with an attorney. Rene Julian McKenzie v. State, Sup. Ct. 12/23/15.

DWI: Warrantless search of driver’s urine is not constitutional under any exception to warrant requirement. Appellant was pulled over and ultimately arrested for DWI after police observed unusual driving conduct and a number of indicia of intoxication. After his arrest, appellant refused blood and urine tests, and was charged with test refusal. Before the district court, appellant challenged the constitutionality of the test refusal statute, but the district court found the statute constitutional. The test refusal charge was submitted to the court under Minn. R. Crim. P. 26.01 (trial to the court via a stipulation to the prosecutor’s case in order to obtain review of a pretrial ruling). The district court found appellant guilty and this appeal followed.

Previous cases have established that the collection of blood, breath, or urine constitutes a search. State v. Bernard, 859 N.W.2d 762 (Minn. 2015), held that warrantless breath tests are  constitutional under the search incident to arrest exception to the warrant requirement. However, State v. Trahan, 870 N.W.2d 396 (Minn. App. 2015), held that a warrantless blood test cannot be justified under the search incident to arrest exception. The court of appeals finds that urine tests, while less intrusive than blood tests, are far more intrusive than breath tests and many other less invasive searches upheld under the search incident to arrest exception (buccal swab of cheek, x-rays, photographs). Urine tests intrude upon an expectation of privacy in the passing of urine that society has long held reasonable. In the implied consent statute, the Legislature also treats blood and urine tests differently than breath tests, which suggests the Legislature, too, considers blood and urine tests to be similar in nature.

Held, a warrantless urine test is unconstitutional and not justified by any exception to the warrant requirement, including the search incident to arrest exception. Because a warrantless blood or urine test is not rendered constitutional by any exception to the warrant requirement, the test refusal statute with respect to warrantless blood and urine tests implicates a fundamental right—the right to be free from unreasonable searches and seizures. The test refusal statute fails strict scrutiny. It serves a compelling government interest, keeping drunk drivers off the road, but is not narrowly tailored. The state has many other viable options to address drunk driving (breath tests, prosecuting without the alcohol concentration, securing a warrant, etc.). As such, the test refusal charge against appellant violated his right to substantive due process.

The court declines to adopt a good faith exception, because such an exception only applies to 4th Amendment violations. Here, no unconstitutional search actually occurred, because appellant refused the tests. Appellant’s conviction is reversed. State v. Thompson, Ct. App. 12/28/15.

– Frederic Bruno

– Samantha Foertsch

Bruno Law

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

Employment discrimination; mixed motives cases. The court of appeals addressed a pair of cases raising issues of “mixed motives” at the end of 2015. It reversed a denial of liability for an employer who withdrew a job offer to an applicant after learning of her pregnancy and her request for a lengthy leave of absence in excess of the employer’s six-week leave policy. Because the employer’s reasons for withdrawing the offer, the failure to inform the employer of the pregnancy and the lengthy leave request, both had a “specific link” to pregnancy, the determination by the Hennepin County District Court was incorrect and warranted remand. LaPoint v. Family Orthodontics, 2015 Minn. App. LEXIS 92 (Minn. App. 2015) (unpublished).

But an employer’s age discrimination claim was rejected in a case in which the Stearns County District Court did not find both legitimate and illegitimate reasons for the discharge. Because no evidence showed there were both permissible and impermissible reasons, the trial court did not err in not determining which of the employer’s reasons was the “motivating factor.” Pearson v. Rohn Industries, Inc., 2015 Minn. App. LEXIS 1174 (Minn. App. 2015) (unpublished).

Workers compensation; no exclusivity bar. A man who died when injured trying to break up a shift altercation at the restaurant where he worked after his shift ended was not barred from a tort claim against the facility. The court of appeals, reversing a ruling of the Hennepin County District Court, ruled that the exclusivity provision of the Workers Compensation Act, Minn. Stat. §176.011, did not bar the claim by the decedent’s estate because of his employment. Henson v. Uptown Drink, LLC, 2015 Minn. App. LEXIS 1185 (Minn. App. 2015) (unpublished).

Workplace safety; failure to abate. A warehouse shipping facility was properly found to have violated Occupational Safety and Health (OSHA) requirements of the state Department of Labor and Industry. The court of appeals upheld an administrative board’s determination that the company failed to maintain a minimum 60° indoor temperature, as required by an OSHA directive. Peterson v. UPS, Inc., 2015 Minn. App. LEXIS 1161 (Minn. App. 2015) (unpublished).

Unemployment compensation; two rare reversals of ineligiblity. The court of appeals ended 2015 with a pair of rarities: reversal of rulings by unemployment law judges (ULJ) deeming employees ineligible for unemployment compensation benefits.

An employee who was fired for providing false information that she had a GED degree did not commit disqualifying “misconduct.” Because the job description did not mention a high school degree or equivalency requirement, the misinformation was not intentional. Wilson v. Mortgage Res. Center, 2015 Minn. App. LEXIS 1179 (Minn. App. 2015) (unpublished).

An employee who quit after her job was switched to 55 miles from her home was entitled to benefits. Because she had vertigo while driving long distances and was intimidated by hearing traffic, she had “good cause” to quit caused by her employment. Carlen v. Young America, LLC, 2015 Minn. App. LEXIS 1183 (Minn. App. 2015) (unpublished).

Unemployment compensation; failure to participate in investigation. An employee who failed to participate in a workplace investigation of her discrimination and harassment allegations was disqualified from benefits. The court of appeals held that the employee’s resignation without cooperation in the inquiry did not constitute “good reason” to quit caused by the employer. Cordes v. Heartland Midwest, LLC, 2015 Minn. App. LEXIS 1151 (Minn. App. 2015) (unpublished).

LOOKING AHEAD

One of the most significant emploment and labor law cases in years will be decided in 2016 by the U.S. Supreme Court in Friedrichs v. California Teachers Association, No. 14-915. The High Court will decide this term whether public sector employees in California, teachers in in this case, may be required to pay labor union fees under state “agency” shop laws requiring particular employees all to be members of collective bargaining units.

Many court watchers predict that the employees will prevail based upon High Court rulings in the past few years, highlighted by Harms v . Quinn, 134 S.Ct. 2618 (2014), in which the Court invalidated an Illinois requirement that quasi-public employees who provide health care services must pay union dues. The decision is likely to have broad ranging impact throughout the public sector, where unions have increased their membership and strength in recent years as private sector unionization has declined.

A Minnesota case, Greene v. Dayton, raises similar issues under the state law allowing unionization of Personal Care Attendants (PCAs), Minn. Stat. 179A.06a, 54, which was upheld by U.S. District Judge Michael Davis, 81 F.Supp. 3d 747 (D. Minn. 2015), affirmed by the Eighth Circuit in Greene v. Dayton, 806 F.3d 1146 (8th Cir. 2015), and is now pending a petition for certiorari in the Supreme Court.

– Marshall H. Tanick

Hellmuth & Johnson, PLLC

FAMILY LAW
JUDICIAL LAW

Modification of parenting time under amended statute. A recent unpublished decision provides a good illustration of the impact of the amendments made in the last legislative session to the statute governing modification of parenting time.

The parties’ 2012 stipulated judgment and decree granted them joint legal and physical custody of their child. Under the decree, father had two overnights every two weeks and additional time on the weekends. After entry of the decree, the child began spending considerably more time with father. In 2014, father brought a motion seeking equal parenting time. A hearing was held and the district court appointed a guardian ad litem, who issued a report recommending equal parenting time. Father moved to adopt the guardian ad litem’s recommendations and at the hearing on that motion, mother asked for an evidentiary hearing to address whether the child was endangered. The court denied mother’s request and issued an order granting father’s motion for equal parenting time.

Mother appealed, arguing that the district court erred by adjudicating father’s motion under the best interest standard of Minn. Stat. §518.175, subd. 5 instead of the endangerment standard. The court of appeals affirmed application of the best interest standard based on the following language, which was added to Minn. Stat. §518.175, subd. 5 in the last legislative session: “A modification of parenting time which increases a parent’s percentage of parenting time to an amount that is between 45.1 to 54.9 percent parenting time is not a restriction of the other parent’s parenting time.”

Under prior law, adding five additional overnights to father’s existing two overnights in order to get to an equal parenting time schedule would have required father to prove endangerment because the increase in time would be substantial enough to constitute a restriction on mother’s parenting time. See, e.g., Pollard v. Pollard, A11-1886 (Minn. Ct. App. 11/26/2012) (holding that parent’s request to expand schedule from 4 out of 14 overnights to 7 out of 14 overnights was substantial enough to constitute restriction on other parent’s time, which required showing endangerment). Ramsammy v. Ramsammy, A15-0503, (Minn. Ct. App. 12/28/2015).

Calculation of income for registered nurse. Father was ordered to pay child support to mother and brought a motion to modify support. Mother was employed part-time as a registered nurse. She testified that she worked 24 hours per week and was a “.6” employee. She also testified that she voluntarily requested a reduction to a “.5” schedule in order to have more time to take care of the children. The CSM calculated mother’s gross monthly income by multiplying her base pay rate by 24 hours worked each week and by 4.33 weeks per month. Father requested district court review because mother’s paystubs showed that in addition to her base pay, she also received pay for overtime, shift differentials, and special pay items which were compensated at a higher rate of pay than her base pay. Also, mother’s paystubs showed that she was working more than 24 hours per week. Father further argued that mother could work more hours than she was working. The district court denied father’s challenges because it was “impossible” for the CSM to determine whether these additional pay items were regularly earned by mother. The district court concluded that it was appropriate not to impute income to mother because registered nurses “customarily work less than 40 hours per week as full time employees.”

Father appealed and the court of appeals reversed and remanded for further proceedings. Even though the various categories of mother’s specialty pay varied between pay periods, she regularly received this additional pay, so it was error to exclude it. Also, mother’s paystubs reflected that she was working more than 24 hours per week. The CSM’s methodology amounted to gross income for mother of $3,264 per month but mother’s actual total gross pay using the first six months of 2014 was $5,105 per month.

As to the CSM’s decision not to impute income to mother, nothing in the record supported the conclusion that registered nurses customarily work less than 40 hours per week as full-time employees and no findings were made to justify less than full-time employment for mother under the “caretaker” factors of Minn. Stat. §518A.32, subd. 5. Carreon v. Sorensen, A15-0528, (Minn. Ct. App. 12/7/2015).

Consideration of new spouse’s income in post-decree spousal maintenance dispute. The parties’ 2010 stipulated judgment and decree required husband to pay permanent spousal maintenance to wife. After an unsuccessful motion to modify in 2012, husband again brought a motion to reduce his spousal maintenance on the grounds that his income had decreased and that wife’s expenses had decreased. The district court reduced husband’s obligation but not to the extent husband had requested. One of the issues husband raised on appeal was the district court’s consideration of his current wife’s income.

Husband presented a household budget for himself and his current wife showing that he paid approximately 75% and his wife paid approximately 25% of their household expenses. This allocation was in proportion to their respective incomes. The district court noted that some of husband’s documentation for the expenses was lacking and that certain expenses were shared on a 1/3-2/3 basis while others were shared on a 1/4-3/4 basis. In light of this, the district court found it reasonable to evaluate husband’s ability to pay maintenance by measuring the total household expenses and the combined income of husband and his current wife.

The court of appeals affirmed this methodology, noting that the district court was not required to accept husband’s apportionment of the expenses. The district court’s award of maintenance reflected an expectation that husband’s current wife would pay 43% of the household expenses, which the court of appeals deemed reasonable. Also, after payment of spousal maintenance as ordered by the district court, husband still had sufficient income to continue paying 75% of the household expenses as he claimed he was doing. Engelhart v. Engelhart, A15-0603, (Minn. Ct. App. 12/28/2015).

LOOKING AHEAD

Medical support-only modification. As of 1/1/2016, a new species of child support modification has become effective whereby parties may seek a modification of the medical support portion of an order and the child dependency tax credit without modifying the other support provisions in the order. The procedure and grounds for doing so are set forth at Minn. Stat. §518A.39, subd. 8.

– Jaime Driggs

Henson & Efron PA

FEDERAL PRACTICE
JUDICIAL LAW

Arbitration; class action waiver; “law of your state.” Resolving a split between the 9th Circuit and the California Court of Appeal, the United States Supreme Court held that an arbitration provision that encompassed the “law of your state” incorporated only “valid” California state law, and not the law of California as it existed at the time the contract was entered into, where then-existing California law subsequently was invalidated by the Supreme Court. DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015).

Voting rights; three-judge panels; power of single judge. A unanimous United States Supreme Court held that once the three-judge panel requirement of 28 U.S.C. §2284 is invoked, a single district judge lacks the authority to dismiss the action under Fed. R. Civ. P. 12(b)(6). Shapiro v. McManus, 136 S. Ct. 450 (2015).

Sanctions; default judgment; no error in refusing to adjourn hearing. Where a default judgment was entered against the defendants as a sanction for their spoliation of evidence and “pattern of dishonesty under oath,” a hearing on damages was scheduled by the district court, one defendant made multiple requests to adjourn that hearing which were denied, the hearing went forward without the defendant in attendance, and the defendant appealed the denial of his adjournment requests, the 8th Circuit found that the district court was entitled to rely on its experience with this defendant in evaluating his motives for requesting the adjournment, and found no abuse of discretion in the denial of those requests. Peter Kiewit Sons’, Inc. v. Wall Street Equity Group, Inc., ___ F.3d ___ (8th Cir. 2016).

Sua sponte Pullman abstension reversed. The 8th Circuit found that a district court had abused its discretion in dismissing an action sua sponte on the basis of Pullman abstention where there was no “unsettled question of state law.” Burris v. Cobb, 808 F.3d 386 (8th Cir. 2015).

28 U.S.C. §1292(b) and Fed. R. Civ. P. 54(b); requests for interlocutory appeals granted and denied. The 8th Circuit found that the potential for delay in the res judicata effect of a judgment was a valid “miscellaneous” factor the district court could consider when deciding whether to certify final judgment under Fed. R. Civ. P. 54(b), and that the district court had not abused its discretion in relying on that factor in entering judgment on a counterclaim. Downing v. Riceland Foods, Inc., ___ F.3d ___ (8th Cir. 2016).

The 8th Circuit rejected a Fed. R. Civ. P. 54(b) certification, finding an abuse of discretion where the district court did not “properly weigh” the relevant factors before entering its partial judgment. Jones v. West Plains Bank & Trust Co., ___ F.3d ___ (8th Cir. 2015).

Judge Nelson denied defendants’ request for 28 U.S.C. § 1292(b) certification in a tort action, finding that the absence of state case law on these issues weighed against certification, because the Eighth Circuit “would be in no better position” than she would be to determine the state law issue. Frazier v. Bickford, 2015 WL 8779872 (D. Minn. 12/15/2015).

Judge Magnuson certified an issue for appeal pursuant to Fed. R. Civ. P. 54(b), finding that the “equities” weighed in favor of permitting the plaintiff to pursue a third attempt at an appeal. Alpine Glass, Inc. v. Country Mut. Ins. Co., 2015 WL 9048306 (D. Minn. 12/16/2015).

n Amount in controversy; mutiple decisions. Adopting a Report and Recommendation by Magistrate Judge Noel, Judge Davis denied a motion to remand an action that had been removed under CAFA, finding that the defendant had established by a “preponderance of the evidence” that the amount in controversy exceeded $5 million. Dammann v. Progressive Direct Ins. Co., 2015 WL 9694633 (D. Minn. 11/20/2015), Report adopted, 2016 WL 128135 (D. Minn. 1/12/2016).

Judge Schiltz denied the plaintiffs’ motion to remand a diversity action, finding that claims that one plaintiff was “severely and permanently injured,” “suffered severe physical and emotional pain and disability” and would “be unable to work in [her] profession in the future,” when combined with a demand letter that itemized almost $850,000 in damages and demanded $500,000 to settle the claim, left little doubt that the amount in controversy exceeded $75,000. Feehan v. Wal-Mart Stores, Inc., 2016 WL 128137 (D. Minn. 1/12/2016).

Enforcement of forum selection clauses; multiple decisions. After dismissing the plaintiffs’ Minnesota Franchise Act claim, Judge Kyle transferred the plaintiffs’ remaining claims, relying on the forum selection clause in the franchise agreement. Moxie Venture L.L.C. v. The UPS Store, Inc., ___ F. Supp. 2d ___ (D. Minn. 2016).

Judge Nelson denied a motion to transfer, finding nothing “so unusual or exceptional” about the case “that it should be transferred despite a valid forum-selection clause.” In Re RFC & ResCap. Liquidating Trust Lit., 2015 WL 8082540 (D. Minn. 12/7/2015).

 •Theft of credit card-related information; standing. Judge Montgomery joined the majority of courts to address the issue and held that plaintiffs’ allegations of future harm, mitigation costs, alleged diminished value of their personal information, delayed or inadequate notification arising from the theft of their credit card information, invasion of privacy and breach of confidentiality, and lost benefit of the bargain were all insufficient to establish standing under Article III. Accordingly, the action was dismissed without prejudice pursuant to Fed. R. Civ. P. 12(b)(1). In Re SuperValu, Inc. Customer Data Breach Lit., 2016 WL 81792 (D. Minn. 1/7/2016).

Personal jurisdiction; effects test. Judge Frank granted the defendants’ motion to dismiss for lack of personal jurisdiction, finding that the defendants’ Minnesota contacts were “random” and “fortuitous,” and also rejected plaintiffs’ attempt to rely on the so-called “effects” test, because the plaintiffs could not establish that the defendants directed their acts at Minnesota or that the defendants knew that the harm was likely to be felt in Minnesota. Judge Frank also denied the plaintiffs’ request for jurisdictional discovery, because the plaintiffs were unable to identify unknown or disputed facts relevant to the personal jurisdiction issue. BNCCORP, Inc. v. BNC Bancorp, 2015 WL 9294326 (D. Minn. 12/21/2015).

– Josh Jacobson

Law Office of Josh Jacobson

INDIAN LAW
LOOKING AHEAD

 • Red Lake Band settles pipeline-trespass dispute. Energy company Enbridge Inc. has agreed to pay the Red Lake Band of Chippewa Indians $18.5 million to settle a trespass dispute concerning a pipeline. The pipeline was built in 1950 across tribal land without the band’s permission under the mistaken belief that the parcel was owned by an adjacent landowner. In 2007, the U.S. Bureau of Indian Affairs discovered that the band owned the parcel, giving rise to a dispute regarding Enbridge’s trespass. In exchange for the payment and purchase of a substitute parcel, the band will convey the pipeline parcel to Enbridge and the Lakehead Pipeline will remain in place.

 • Fond du Lac Band begins land buyback. U.S. policy during the late 1800s allotted parcels to tribal members but disallowed typical estate planning, instead requiring the landowners to pass the land to all their descendants in equal part ad infinitum. More than 100 years later, scores of native-descendant landowners hold uselessly small tracts of land, and a single 160-acre parcel may have hundreds of owners. The Fond du Lac Band of Lake Superior Chippewa is now commencing a buyback program in order to reconsolidate the land. In March, it will send purchase offers to those descendant landowners it can locate. The land-buyback program is part of a several-year-long implementation of the $3.4 billion settlement of a class-action suit concerning the United States Department of Interior’s mismanagement of Indian trust assets.

– Jessica Intermill

– Peter J. Rademacher

Hogen Adams PLLC

REAL PROPERTY
JUDICIAL LAW

Contracts; trespass; nuisance. Property owner prevailed on claims of common law trespass, nuisance, unjust enrichment, conversion, and civil theft in a water dispute. DeLanghe had agreed to allow a local ethanol plant to drill two wells on his land and pump water for use in their production facility in exchange for one-time payment. The wells deteriorated and the ethanol plant sought to drill extra wells on the well site. DeLanghe insisted that the original contract had terminated and objected to the ethanol plant’s plan. The plant, over these objections, drilled additional wells. The United States District Court determined that the parties’ written contract permitted the ethanol plant to operate only the initial two wells themselves because the contract referred to the operation of “wells” rather than the “well site.” The court held that the ethanol plant was not permitted to drill additional wells on the site, and the property immediately reverted back to DeLanghe once the original two wells were non-operational. The court awarded DeLanghe summary judgment on all claims except for statutory trespass. The statutory trespass claim failed because the court interpreted the definition of “personal property” under Minn. Stat. §548.05 to include only property that is a product arising out of soil, and to exclude property that is not, like water. DeLanghe v. Archer Daniels Midland Company, No. 13-4329 (D. Minn. 1/12/2016).

Mortgage foreclosure; deficiency judgment. Debtor-mortgagor defaulted upon a mortgage loan and lost her residence to judicial foreclosure. Creditor-mortgagee obtained a deficiency judgment greater than $400,000. Debtor and creditor negotiated a standstill agreement to settle the deficiency agreement. Debtor provided financial statements showing limited assets and significant debt. The parties agreed to settle the matter for $36,453. Creditor later learned that debtor owned farmland valued at $359,000. The creditor sued the debtor and obtained summary judgment on claims of negligent misrepresentation and fraudulent inducement. The Minnesota Court of Appeals determined that the creditor could not obtain summary judgment on the negligent misrepresentation claim because the debtor and creditor were adversarial parties negotiating at arms-length. However, the court of appeals held that the creditor’s summary judgment was supported by a theory of fraudulent inducement because the court found that the debtor submitted documents that purported to list all her assets. The court concluded that the misrepresentation by omission was sufficient to vacate the settlement agreement. Highland Bank v. Wyatt, No. A15-0275 (Minn. Ct. App. 12/14/2015) (unpublished).

Property demolition. Property was placed in a vacant housing program in August 2012. The city performed an inspection, generating a report of all repairs required before the home could be occupied again. The city later deemed the home a nuisance. The city provided notice to the property owner at the time of the report and the time of the nuisance determination. The court of appeals held that the repeated notices and warnings to the owner that the home would be demolished without his full compliance with the report constituted sufficient due process. Adams v. Saint Paul City Council, Nos. A14-2164 (Minn. Ct. App. 12/14/2015) (unpublished).

 • Inverse condemnation. MNDOT created a right-turn lane onto a highway on a portion of property owned by appellant. Appellant’s unimproved property did not previously have a driveway from either the county road or highway. The addition of the right-turn lane prevented any driveway from being added later to the county road. The court of appeals affirmed the district court’s grant of summary judgment and held that the property owner did not have access rights that were taken or compensable. The property owner did not provide evidence that it would have been allowed, before the highway project, to add an access point to the county road. Fisher v. State of Minnesota, Department of Transportation, No. A15-0959 (Minn. Ct. App. 12/21/2015) (unpublished).

Mortgages. Mortgage servicer foreclosed upon a home after numerous notices and offers to negotiate a modification. An initial letter to the borrower incorrectly stated that the foreclosure sale had been postponed to 3/7/2014. Multiple later letters and notices stated the correct date of 1/7/2014. After foreclosure, the borrower sued for claims of false, deceptive, or misleading communications in connection with a residential loan transaction in violation of Minn. Stat. §58.13 and for failure to halt a foreclosure sale under Minn. Stat. §582.043. The district court concluded that section 58.13 was inapplicable because the servicer’s notices were not made “in connection with a residential loan transaction.” The court of appeals held that the phrase “residential loan transaction” includes communications and agreements related to loan default, reinstatement, and modification, but affirmed summary judgment in favor of the mortgage servicer. The court of appeals also held that the mortgage servicer’s duties under section 582.043 were met because the borrower did not affirmatively provide documentation and information to the servicer so that the servicer could review and evaluate a modification. LeMaster v. Green Tree Servicing, LLC, No. A15-0552 (Minn. Ct. App. 12/28/2015) (unpublished).

Landlord-tenant. The Minnesota Court of Appeals held that a breach of the statutory covenant of habitability is contractual in nature because it is incorporated into all lease contracts, and therefore only damages sounding in contract may be awarded. The court held that full rent abatement is generally not allowed unless the tenant shows that it received absolutely no use or enjoyment from the premises. Tenants must demonstrate and provide specific evidence of inhabitability and how the conditions reduced their use and enjoyment. Ghebrehiwet v. Ghneim, No. A15-0397 (Minn. Ct. App. 1/11/2016) (unpublished).

– Joseph P. Bottrell

Meagher & Geer, PLLP

 TAX
JUDICIAL LAW

The rules are the rules are the rules. Two Minnesota taxpayers saw their causes of action dismissed for failure to follow procedural requirements. Minnesota taxpayers have 60 days (or 63 if the commissioner mails her order to the taxpayer) to appeal an order of the commissioner. Minn. Stat. §271.06, subd. 2 (2014). Untimely appeals, such as the one filed by the taxpayer in this dispute involving unpaid withholding tax in relation to the affairs of a corporation related to the taxpayer, are dismissed for lack of subject matter jurisdiction. Valder v. Comm’r, No. 8846-R, 2015 WL 9461393, at *1 (Minn. Tax 12/22/2015). In another dispute, the taxpayer did not miss a filing deadline, but his petition was dismissed because he failed to serve the commissioner, a requirement imposed by Minn. Stat. §271.06, subd. 2 (2014). Timely service, as described by the court, “is a prerequisite to jurisdiction.” Zygadlo v. Comm’r, No. 8848-R, 2015 WL 9486066, at *1 (Minn. Tax 12/22/2015).

Summary judgment denied in sales tax dispute. The tax court denied a taxpayer’s motion for summary judgment and indicated a trial date will be set in a dispute involving the assessment of sales and use tax on tangible property sold by the taxpayer, Haldeman Homme, Inc., to construction company Kraus–Anderson. The taxpayer argued that sales tax should not have been due because the items sold were not “real property” within the meaning of Minnesota Statute Section 297A.61.  Because the court was unable to determine, on the record before it, that the items fell within the exemption (the taxpayer could not “demonstrate there is no genuine issue of material fact that the items sold to Kraus–Anderson were not ‘building materials, supplies, and equipment’”), summary judgment was improper. Haldeman Homme, Inc. v. Comm’r, No. 8711-R, 2015 WL 9461353, at *1 (Minn. Tax 12/18/2015).

Good tax policy trumped by “plain language;” tax loss permitted. A married taxpaying couple assigned their euro put option to a charity and as part of that assignment, the couple simultaneously marked to market the value of the put option. As the court explained, the couple’s assignment of this option was part of a series of transfers of mutually offsetting foreign currency options that the couple executed over a period of three days. These transactions appear to have allowed the couple to generate a large tax loss at minimal economic risk or out-of-pocket expense. The tax court disallowed the claimed loss. The 6th Circuit, however, reversed. The court noted that “[w]hile the Tax Court’s disallowance of the [couple’s] claimed tax loss makes sense as a matter of tax policy, the plain language of the statute clearly provides that a foreign currency option can be a ‘foreign currency contract.’” The mark to market was therefore appropriate, and the court reversed and remanded. Wright v. Comm’r, No. 15-1071, 2016 WL 76886, at *1 (6th Cir. 1/7/2016).

More than taxpayer’s word needed to establish worthlessness for bad debt deduction. Taxpayers are permitted a deduction for worthless debt, but to be eligible for a deduction, the debt must actually be a debt: In the words of the Code, the debt must be “bona fide” and it must actually be worthless. IRC 166(a). A taxpayer advanced just over $800,00 to her family’s company. The corporation began facing financial difficulties and the president of the company—who was also taxpayer’s brother—informed taxpayer that she would not be repaid. Taxpayer listed the debt as bad debt on her tax return and this bad debt generated a deduction. The IRS denied her loss deduction and issued a deficiency notice. The tax court and ultimately the 9th Circuit upheld the determination of deficiency because the taxpayer did not meet her burden of proving that the amount qualified as bad debt under I.R.C. §166. In particular, the taxpayer’s behavior was not consistent with that of a traditional lender. For example, she continued to advance money to the company despite its unstable finances and the company’s failure to repay any interest or principal. The taxpayer’s testimony, even coupled with the testimony of her brother that the company was insolvent, was insufficient to prove worthlessness. Shaw v. Comm’r, 623 F. App’x 467, 468 (9th Cir. 2015).

Taxation of medical residents: variations on a theme. A medical resident and citizen of Pakistan appealed a notice of deficiency of $4,415 in petitioner’s federal income tax. Petitioner argued that under article XII and article XIII(3) of the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes and Income, U.S.-Pakistan, he was exempt from paying taxes as a medical resident at Oklahoma University. Article XII states that “a professor or teacher… who temporarily visits… for the purpose of teaching for a period not exceeding two years… shall by exempted from tax.” The court discussed petitioner’s purpose for entrance into the US, specifically his “objective, goal, or end.” The court concluded that although part of petitioner’s duties was to teach medical students, petitioner came to the US for his own educational purposes in becoming a doctor. Further, petitioner argued without providing any authority that under article XIII(3), he was exempt from paying taxes. Yet, the Department of Treasury explains this exemption applies to “‘Pakistan personnel invited to the United States for training or study by our Government,’” of which petitioner does not qualify as a medical resident seeking further education who happens to reside in Pakistan. Thus, incidental teaching as a part of a medical resident’s responsibilities does not free the petitioner from paying income taxes under the U.S.-Pakistan treaty.  Bhutta v. Comm’r, 145 T.C. No. 14, 2015 WL 9426274 (12/22/2015).

Valuation adjustments for fine art. Deceased Bernice Newberger had three valuable pieces of art: the pieces in the estate included Tête de Femme (Jacqueline) by Pablo Picasso (the Picasso), Untitled by Robert Motherwell (the Motherwell), and Elément Bleu XV by Jean Dubuffet (the Dubuffet). Due to a precipitous decline in the fine art market in the autumn of 2008, the fair market value of the pieces at the time of Newberger’s death in July 2009 was challenged. The court determined that the value claimed by the estate of two of the pieces (the Motherwell and the Dubuffet) was accurate. The value of the Picasso, however, was not. The estate claimed a value of $5 million. The court adjusted that value to $10 million, and in fact the piece was later sold at auction for $12,927,874. The Motherwell, compared to In Black and White No. 5 which sold for $1,426,500 in November 2010, was valued at $800,000. The Dubuffet, compared to Element Bleu XIII’s sale in 2007 for $825,000, was valued at $500,000.  Estate of Newberger v. Comm’r, Tax Ct. M. (RIA) 2015-246 (T.C. 2015).

Hollywood production manager prevails in establishing he is an independent contractor, not an employee.  In an entertaining opinion that provides an accessible primer on the distinction (for tax purposes) between independent contractors and employees, the tax court held that a production worker working on commercial shoots in Southern California was not an employee, but an independent contractor. Since independent contractors are permitted to deduct business expenses on Schedule C and are not subject to many limitations on deducting business expenses (limitations that apply to employees), the taxpayer was found to have properly deducted his business expenses, and was not liable for any penalties. Quintanilla v. Comm’r, T.C.M. (RIA) 2016-005 (T.C. 2016).

LOOKING AHEAD

Have you filed? The Minnesota Department of Revenue reminded Minnesotans that Minnesota taxpayers could begin filing their state income tax returns on Tuesday, January 19, 2016—the same date that the Internal Revenue Service will begin accepting federal income tax returns. Readers might want to plan ahead should they anticipate telephonic assistance from the IRS with any filing questions this season; according to the General Accounting Office, the Internal Revenue Service provided its lowest level of telephone service during fiscal year 2015 compared to prior years, with only 38 percent of callers who wanted to speak with an IRS assistant managing to reach one.

– Morgan Holcomb

– Kate Rawls

Mitchell Hamline School of Law

TORTS & INSURANCE
JUDICIAL LAW

Evidence: admissibility of Alford plea in subsequent civil trial. Defendant was charged with criminal sexual conduct. Defendant pled guilty pursuant to an Alford plea, meaning his plea did not include an admission of guilt—only an admission that, “if the jury were to believe the witnesses in this case… there’s a reasonable probability that [he] might be found guilty.” Following the conviction, the victim filed suit seeking damages for sexual battery and sexual abuse. In response to pretrial motions, the district court held that the plea was not collateral estoppel on the issue of abuse and further held that it was inadmissible under Minn. R. Evid. 403. Following a jury verdict in favor of defendant, the Minnesota Court of Appeals affirmed the evidentiary ruling.

The Minnesota Supreme Court affirmed. The Court began by discussing the nature of Alford pleas, conceding that they generally carry “the same penalties and collateral consequences as a conventional guilty plea,” and noting that guilty pleas in criminal matters are generally admissible in subsequent civil cases regarding the same course of conduct. Nevertheless, the Court, on an issue of first impression, held that the trial court did not abuse its discretion in excluding the plea under Rule 403. The Court repeatedly emphasized the broad discretion of the trial court on Rule 403 issues, and further acknowledged the potential risk of unfair prejudice—in particular, unfair prejudice from jury confusion—that could result from admission of an Alford plea. The Court refused to address the collateral estoppel issue because the plaintiff did not appeal that decision.

Justice Lillehaug filed a dissenting opinion, arguing that the district court abused its discretion by mischaracterizing the legal effect and probative value of the Alford plea, and by exaggerating the purported danger of prejudice, confusion, or misleading effect. Jane Doe 136 v. Liebsch, No. A14-0275 (Minn. 12/30/2015). http://mn.gov/lawlib/OPA140275-123015.pdf

– Jeff Mulder

Bassford Remle, A Professional Association

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