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

Notes & Trends – April 2016

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.

BANKRUPTCY
JUDICIAL LAW

Customer of a debtor check processing company not entitled to recovery of commingled funds in possession of the Chapter 7 trustee. Debtor provided automated clearinghouse and check processing services. Among many other customers, it processed checks for Rent-A-Center East, Inc. (RAC) under a processing client agreement. Debtor’s normal practice was to commingle the funds of all its customers in a single account at North American Bank as part of its regular practice for transferring funds. Prior to the bankruptcy, RAC did not know how debtor processed its checks. As of the date of filing, RAC asserted it was owed approximately $2.4 million. North American Bank turned over to the trustee approximately $830,000. RAC filed an adversary action, seeking recovery of the bulk of these funds. RAC argued three theories: (1) that an express trust was created by the processing agreement; (2) a resulting trust; or (3) a constructive trust. The case was dismissed by the bankruptcy court, which was affirmed by the district court. The 8th Circuit affirmed these decisions. First, it held that the processing agreement explicitly permitted funds to be commingled, meaning that the relationship was one of debtor and creditor, and not trustee and beneficiary, citing In re LGI Energy Solutions, Inc., 460 B.R. 720, 729 (B.A.P. 8th Cir. 2011) (applying Minnesota law). Second, the 8th Circuit held there was no resulting trust. It noted that a resulting trust can be found if the intention of the payor was that the receiving party was to keep money in a separate fund for the benefit of the payor or a third party. It found that RAC’s ignorance whether its funds would be processed through a non-comingled account meant it could not show the intent to imply a trust relationship. Third, the 8th Circuit held that RAC was not entitled to the equitable remedy of a constructive trust. It noted that bankruptcy courts are reluctant to create a post-petition constructive trust, given the general intent of bankruptcy to maintain a level playing field for all creditors. The court found that as part of the process for handling checks, RAC was required to endorse all checks to debtor, meaning that RAC no longer had any property rights in the checks. In Re WEB2B Payment Solutions, No. 14-3190 (8th Cir., 3/4/2016).

—Patrick C. Summers

DeWitt Mackall Crounse & Moore S.C.

COMMERCIAL AND CONSUMER LAW
JUDICIAL LAW

Motors Liquidation update. In the March 2015 edition of these notes, there was a story on the expensive mistake in In re Motors Liquidation involving a $1.5 billion term loan where perfection of a lender’s security interest was inadvertently lost by the erroneous filing of a termination statement, and thus the unperfected security interest was avoided in bankruptcy. Not surprisingly, in July 2015 an attempted class action was filed against JP Morgan Chase, the lead bank in the lending syndicate for the loan, and against the Simpson Thacher law firm, counsel to JP Morgan. Perhaps surprisingly, but then perhaps not given the parties involved, in October the participating lenders in the loan voluntarily dismissed the suit. Thus, the case now stands for the valuable lesson that advising on UCC Article 9 is not for novices, but also that even the best of us must be very careful with UCC Article 9 with respect to even “administrative” details.

outside the line. Notwithstanding the above update, UCC Article 9 does put forth clear, detailed, and easy-to-follow rules that provide certainty for the many transactions that fall within its confines. But not always. Aside from definitions that can delineate scope, the basic provision on the scope of Article 9 lies in Section 9-109. Because insurance is usually extensively regulated in the states, Section 9-109(d)(8) does not apply to “a transfer of an interest in or an assignment of a claim under a policy of insurance,” except as to a health care insurance receivable and with respect to proceeds and priorities in proceeds. Thus separate insurance premium financing statutes in many states govern an extension of credit to acquire insurance secured by the rights under the policy. In Minnesota, see Minn. Stat. Chpt. 59A.

In a recent case, a lender to a bankrupt railroad had a security interest in accounts, general intangibles and payment intangibles, and was perfected as to these assets by a proper filing in Delaware. A disastrous train wreck prompted the bankruptcy, not only because of the damage (explosion, deaths, loss of equipment) but also because of the interruption of business. The railroad had a $7.5 million business interruption policy, settled the claim for $3.8 million, which was approved by the bankruptcy court, and the issue was who got the insurance settlement—the bankruptcy estate, or the lender who argued it had a perfected security interest in the settlement by filing.

The answer was less than clear. The court thought the exclusion applied to the use of the insurance policy as original collateral or to any assignment of the claim under an insurance policy. In short, the exclusion applied to the transfer of interests inseparable from insurance policies.

The lender, however, pointed to Official Comment 15 to Section 9-109, which provides once a claim arising in tort is settled and reduced to a contractual obligation to pay, the right to payment becomes a payment intangible and ceases to be a claim arising in tort. This analysis also led to the lender’s argument that the payment also constituted an “account” under the definition in Section 9-102(a)(2). Neither argument impressed the 1st Circuit; indeed, the inclusion of a health care insurance receivable in the exclusion was inconsistent with the argument about an “account.”

That being so, the question remained if UCC Article 9 did not apply so as to allow perfection (and perhaps classification of the collateral for UCC purposes), was the security agreement broad enough and was filing a financing statement adequate? The court, absent a state statute, looked at the common law, which it thought was unclear on the issue, but concluded the state law would require more for perfection than a filing.

In the end, UCC Article 9 may not provide the appropriate rules, but the other law of the state may. It would behoove a lender, however, to specifically claim insurance as collateral and perhaps notify the insurance company of its claim or become a loss payee on the policy, as well as file, absent a specific statute. It also may be well to focus on the exclusion exception for “proceeds” in Section 9-109(b)(8) and look at the definition of “proceeds” in Section 9- 102(a)(64)(E), which includes “insurance payable by reason of the loss or damage to collateral,” and see MNC Commercial Corp. v. Rouse, 1992 U.S. Dist. LEXIS 22166 (W. D. Mo. 1992), appeal dismissed, No. 90-1038 (8th Cir. 1993). In re Montreal, Main & Atlantic Ry., Ltd., 87 UCC Rep – Serv. 2d 495 (1st Cir. 2015).

‘Rent-a-bank’ update. The February 2016 edition of this column, under the heading “Division of Opinion,” discussed what may be termed as “rent a bank” and “rent a tribe” approaches to avoiding state lending restrictions. For obvious reasons such an approach involves risk, as two recent developments demonstrate.

In Commonwealth of Pennsylvania v. Think Finance, Inc., et al., Case No. 2:2015 cv00092 (E.D. Pa. 2015), the court refused to dismiss racketeering claims under Pennsylvania’s Corrupt Organizations Act against companies alleged to have partnered with a state bank to market internet loans with triple-digit interest rates where the bank acted as the nominal lender while the companies were the de facto lenders in marketing, funding, and collecting the loans.

In New York the alleged owner and operator of payday lending companies has been indicted by a federal grand jury charging criminal violations of both RICO and the Truth in Lending Act (the disclosures given were materially deceptive and misleading) by making internet payday loans at rates in excess of 700% and in failing to be properly licensed. It is alleged that the owner entered into sham business relationships with three Indian tribes in a “rent a tribe” scheme, which purportedly allowed the owner to avoid the application of state usury laws based on tribal sovereign immunity.

—Fred Miller

Retired G.L. Cross Research Professor,

University of Oklahoma

CRIMINAL LAW
JUDICIAL LAW

Postconviction: Stay of adjudication not conviction for postconviction purposes. In December 2007, appellant entered a plea of guilty to a fifth-degree controlled substance crime as a stay of adjudication, pursuant to Minn. Stat. §152.18, subd. 1. Appellant was discharged from probation and the charge was dismissed in October 2010, and appellant filed a petition for postconviction relief in July 2015, seeking to withdraw her plea based upon testing deficiencies discovered at the St. Paul Police Department Crime Lab. The district court denied her petition without a hearing as time-barred.

Held, appellant was not convicted of a crime, so the district court lacked jurisdiction to consider her postconviction petition and properly denied her petition. Postconviction relief is available only to “a person convicted of a crime.” Minn. Stat. §590.01, subd. 1. In Smith v. State, 615 N.W.2d 849, 851-52 (Minn. App. 2000), review denied (Minn. 9/26/2000), the court of appeals held that a stay of adjudication under Minn. Stat. §152.18, subd. 1, could not be considered a conviction for postconviction purposes, because a stay of adjudication is not an “adverse final judgment” and, therefore, leaves the defendant with no appeal of right. Subsequent cases have found that felony stays of adjudication are directly appealable as sentences, but those cases did not address stays of adjudication in a postconviction setting. Under Dupey v. State, 868 N.W.2d 36, 39-41 (Minn. 2015), a stay of adjudication under Minn. Stat. §152.18, subd. 1, does not result in a “judgment of conviction or sentence” triggering the statute of limitations for filing a postconviction petition. Because there is no adjudication of guilt under a stay of adjudication, there is, by definition, no “judgment of conviction.” Without a judgment of conviction, a person is not convicted of a crime, and, therefore, cannot seek postconviction relief.

The court also declines to exercise its discretionary review, which allows the court to review otherwise unappealable orders “in the interests of justice.” Amanda Jean Lunzer v. State, Ct. App. 2/1/2016.

Postconviction: Motion to reconsider order denying relief does not toll time period to appeal order; appeal dismissed. After a bench trial in 2010, appellant was convicted of two counts of first-degree murder. His conviction was confirmed on direct appeal in 2012. Appellant filed a petition for postconviction relief in October 2014, alleging newly discovered evidence and ineffective assistance of counsel. The petition was denied. He filed a second postconviction petition a few days later, which was also denied. In November 2014, appellant filed “motions to reconsider” the orders denying his postconviction petitions. Both motions were denied in January 2015. Appellant retained counsel, and, in March 2015, appealed from the October 2014 and January 2015 orders. The state moved to dismiss the appeal, arguing that the October 2014 orders were not appealed within 60 days, and the January 2015 order was not appealable.

Minn. R. Crim. P. 29.03, subd. 3(d), requires that an appeal from an adverse final order in a postconviction proceeding in a first-degree murder case be filed within 60 days after its entry. Appellant did not appeal the orders within 60 days, and the appeal is timely only if an intervening event tolled the time for filing an appeal. Minn. R. Civ. App. P. 104.01, subd. 2, lists the type of motions that toll an appeal deadline, and a motion for reconsideration is not among them. A comment to the rule makes clear that this omission is purposeful. Held, filing a motion to reconsider does not toll the time period for filing an appeal from a postconviction order, and appellant’s appeal was not timely. Appeal dismissed. Craig Matthew Hohenwald v. State, Sup. Ct. 2/26/2016.

Procedure: Court may dismiss complaint for prosecutor’s unnecessary pre-charge delay if defendant was prejudiced by delay. Appellant was charged with domestic assault by strangulation in March 2013. Three days later, a domestic abuse no contact order and an ex parte permanent order for protection were issued. The OFP was later dropped, but the DANCO remained in effect. In June 2013, appellant was arrested for having contact with the victim, after a police officer observed the appellant and victim together and found that the victim had an active OFP against appellant. The state originally charged appellant in June 2013 with violation of an OFP, but the charge was dismissed. In May 2014, the state charged appellant for violating the DANCO. Appellant moved to dismiss the charge under Minn. R. Crim. P. 30.02, due to the state’s unnecessary delay in charging him with violating the DANCO, but the district court denied his motion. After a jury trial, appellant was convicted.

Held, Rule 30.02 does apply to pretrial delays, but requires a showing of prejudice before dismissal is warranted. Rule 30.02 states that a district court “may dismiss the complaint… if the prosecutor has unnecessarily delayed bringing the defendant to trial.” The charging process is integral to “bringing a defendant to trial,” so the rule plainly contemplates dismissal for pre-charge delay. This reading of the rule complements Rule 11.09, which allows for a defendant’s release upon failure to timely commence trial, and is supported by Fed. R. Crim. P. 48(b), the federal counterpart to Rule 30.02, which “expressly applies to pre-charge delay” and is interpreted as a “restatement of the inherent power of the court to dismiss a case for want of prosecution.”

Dismissal under Rule 30.02, however, requires a showing of prejudice, as is made clear by Minnesota Supreme Court cases applying Rule 30.02. Here, the district court found no prejudice, “noting that [Appellant] was not incarcerated during the [delay]…, he did not show that he experienced any anxiety or concern over the possibility of renewed charges, and he did not show that his defense would be impaired by the delay.” The district court did not abuse its discretion when it denied appellant’s motion to dismiss. State v. Rafael Alfonso Banks, Ct. App. 2/8/2016.

Procedure: New trial not permitted for district court’s failure to comply with Minn. R. Crim. P. 26.01, Subd. 4: Appellant was charged with first-degree refusal to submit to testing and first-degree driving under the influence. Appellant’s pretrial motion to dismiss for lack of probable cause, challenging the constitutionality of the implied consent statute, was denied. Appellant entered into a plea agreement with the state in order to resolve this case without a jury trial. The agreement included dismissal of the driving under the influence charge. Appellant signed a plea petition stating that he was waiving his right to a jury trial and pleading guilty to the test refusal charge. He entered a guilty plea on the record “to the charge… of first degree refusal by way of a Lothenbach plea,” and the parties submitted “Joint Stipulated Facts” to the district court. The district court then adjudicated appellant guilty.

Despite the entry of a guilty plea, appellant and the state appear to have intended to proceed under Minn. R. Crim. P. 26.01, subd. 4, which allows for a criminal defendant to plead not guilty, waive all trial rights, stipulate to the state’s evidence in a court trial, and then appeal a dispositive, pretrial ruling. Rule 26.01, subd. 4, has replaced Lothenbach as the method for preserving dispositive pretrial issues for appellate review in a criminal case. The record in this case is replete with references to a Lothenbach plea. Before the court of appeals, appellant argued that the implied consent statute is unconstitutional, and that his conviction was invalid because the district court did not comply with the procedures set forth in Rule 26.01, subd. 4. The court of appeals found that his plea did not comply with Rule 26.01, subd. 4, but affirmed his conviction, treating the case as if the district court had complied with Rule 26.01, subd. 4.

Multiple prior cases have allowed convictions to stand and appeals to continue despite reliance on flawed attempts to comply with Rule 26.01, subd. 4, or the Lothenbach procedure. Thus, strict compliance with Rule 26.01, subd. 4, or Lothenbach has never been required. Plain error analysis applies to unobjected-to errors committed under Rule 26.01, subd. 4, under both the rules of criminal procedure and prior cases.

The Supreme Court finds that appellant did not meet the plain error standard. There were many errors committed by the district court (in complying with Rule 26.01, subd. 4, or even Lothenbach’s less stringent requirements), and those errors were plain. However, appellant failed to show that the errors affected his substantial rights. Appellant’s conviction is affirmed. The Court concludes with a cautionary note: “Although we affirm [Appellant’s] conviction today, it would be a mistake to minimize the errors that spawned this appeal. Lothenbach has not been the law in this state for more than 8 years. The fact that the district court and experienced attorneys are still attempting to employ a procedure long ago superseded by rule is, to say the least, concerning. It is made all the more alarming because, even if Lothenbach were still the law, the district court’s procedure in this case failed to even comply with Lothenbach’s requirements.” State v. Joshua Lee Myhre, Sup. Ct. 2/17/2016.

•  Search and seizure: Warrantless search of vehicle lawful under automobile exception if probable cause to believe vehicle contains controlled substance. Police received a tip from a confidential reliable informant (CRI) that a heroin delivery would be made by “J” at a specific location within “approximately 10 minutes.” Surveillance was conducted with the CRI, and “J” was observed as a passenger in a Charger driven by respondent. After stopping at a gas station, “J” exited the vehicle and walked north while talking on a cell phone and looking around. In a McDonald’s parking lot, “J” met with a white male in Grand Am. “J” got into the Grand Am. Both vehicles were then stopped. The Charger was searched, and several baggies of heroin were found concealed behind a panel in the Charger’s center console. The district court denied respondent’s pretrial motion to suppress the heroin, finding the search of the Charger lawful under the automobile and search-incident-to-arrest exceptions. After a bench trial, appellant was found guilty of third-degree possession of a controlled substance. The court of appeals reversed, finding that the police did not have probable cause to arrest respondent or search his car.

A warrantless search is lawful under the automobile exception if there is probable cause to believe the search will result in the discovery of evidence or contraband. Here, the CRI provided a detailed tip, which was corroborated by police surveillance. The trial court properly deemed the CRI reliable, based on the veracity of the CRI’s tips in prior investigations and because the details of the CRI’s tip in this case were independently corroborated by law enforcement. Police also testified that, based on their experience and training, “J” and respondent’s behavior was consistent with a typical drug deal. Based on the totality of circumstances, there was probable cause to believe respondent’s car contained heroin.

The Supreme Court discredits the court of appeals’ conclusion that any probable cause dissipated once “J” left the car as not properly accounting for the totality of the circumstances. Reversed and remanded. State v. Jimmy Dawayne Lester, Sup. Ct. 2/10/2016.

Assault: Conviction for assault-harm does not require proof that appellant intended to inflict bodily harm. Appellant was charged with first-degree assault after she pushed another person twice, causing him to fall backwards into a fire. The victim sustained third-degree burns, requiring skin grafting surgery on his arm and hand. Appellant was convicted following a bench trial. On appeal, appellant argues that the evidence was insufficient to support her conviction when she committed intentional hostile and forceful act, which substantially caused injury, but did not intend to inflict bodily harm.

An assault conviction requires either “an act done with intent to cause fear in another of immediate bodily harm or death” (assault-fear) or “the intentional infliction of or attempt to inflict bodily harm upon another” (assault-harm). Assault-harm is a general intent crime, which requires only that the defendant commit an intentional act, and does not require proof that the defendant meant to violate the law or cause a particular result. Here, the evidence is sufficient to support the district court’s findings that appellant committed voluntary, intentional acts, and that those acts ultimately resulted in great bodily harm to the victim. State v. Alie Christine Theodore Dorn, Ct. App. 2/16/2016.

DWI: Suspected impaired driver need not be taken before judge prior to administration of implied consent testing. After her arrest for DWI, appellant was transported to the police station, where she was read the implied consent advisory. Appellant spent over half an hour making calls to attorneys, and then asked that she be taken in front of a judge to perform a breath test. The officer refused, and again requested that appellant submit to a breath test. Appellant refused, and she was charged with test refusal, driving under the influence, and obstructing legal process. A jury found her guilty of test refusal and obstruction.

On appeal, appellant argues that the police violated her right to be taken immediately to a judge before submitting to a breath test, based on her interpretation of Minn. Stat. §169.91, subd. 1. That statute provides, in part, that “[w]hen any person is arrested for any violation of any law or ordinance relating to the operation or registration of vehicles… the arrested person shall be taken into custody and immediately taken before a judge… in any of the following cases: (1) when a person arrested demands an immediate appearance before a judge… (4) when the person is arrested upon a charge of driving or operating or being in actual physical control of any motor vehicle while under the influence of intoxicating liquor or drugs.” Appellant’s arrest is subject to this statute, but her challenge turns on the definition of “immediately” as used in the statute.

The statute does not define “immediately,” so the court of appeals applies its plain meaning, which requires an examination of the common usage of the word in its application to an existing situation. “Immediately” can mean “occurring without delay; instant,” but “immediate” events might also be separated either by short or long periods of time, depending on the context. Given the historical context of this statutory provision, the court of appeals holds that the statute does not require the presentation of an arrestee to a judge before completing the administrative steps incident to arrest. The arrest is not complete until the administrative duties attending the arrest are complete. In DWI cases, that includes the administration of an implied consent test. In addition, in this case, once appellant’s arrest was complete (after she was booked), she was immediately released. Thus, she was not entitled to be brought before a judge, because she endured no post-arrest pretrial confinement. State v. Michelle MacDonald Shimota, Ct. App. 2/16/2016.

•  6th Amendment: No 6th Amendment right to video record trial. Prior to her DWI trial, appellant moved the district court to allow her to video record her trial, relying on the 6th Amendment. The district court denied her motion after the state refused to consent to the recording. On appeal, appellant “argues that by superimposing a defendant’s 6th Amendment right to a public trial and the public’s or media’s 1st Amendment right to attend a trial or to record it over a defendant’s objection, we should recognize that a defendant has a constitutional right to record her own trial.”

The court of appeals recognizes that the courts do not have the authority to create new constitutional rights, and the right to record one’s own trial is not implied by any express constitutional right. Finally, appellant’s argument is not supported by the purpose of the 6th Amendment. The purpose of the 6th Amendment’s public trial guarantee is to protect the accused from prosecutorial and judicial abuse, but there is no correlative right in members of the public to insist upon a public trial. The district court did not abuse its discretion by not allowing appellant to video record her trial. State v. Michelle MacDonald Shimota, Ct. App. 2/16/2016.

—Frederic Bruno

—Samantha Foertsch

Bruno Law

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

Union cases; unfair labor practice and employee discipline. The 8th Circuit Court of Appeals recently decided a pair of important labor union cases, one favorable to management, the other partially favoring a union.

In one case, it refused to enforce a ruling by an administrative law judge that a masonry contractor refused to honor a labor union agreement and did not follow hiring procedures established with a union hiring hall. Because the union and the National Labor Relations Board (NLRB) have failed to establish the violation by the contractor, the ruling was overturned. NLRB v. Seedorff Masonry, 2016 Minn. App. LEXIS 2268 (Minn. App. 2016) (unpublished).

But a labor union fared better in another case. The court upheld an order of the NLRB that an employer violated federal law by making an overly broad rule prohibiting employees from soliciting for union membership. But it overturned the portion of the ruling that found the employer wrongfully prevented an employee from soliciting membership in the union. Conagra Foods, Inc. v. NLRB, 2016 Minn. App. LEXIS 2838 (Minn. App. 2016) (unpublished).

Racial discrimination; barred by bankruptcy. An employee’s lawsuit for wrongful termination due to racial discrimination was not actionable because she failed to disclose the claim in a prior bankruptcy. The 8th Circuit Court of Appeals ruled that the non-disclosure in the Chapter 13 proceeding barred the claim. VanHorn v. Martin 2016 Minn. App. LEXIS 2355 (Minn. App. 2016) (unpublished).

Arbitration award; post-interest required. Post-interest on an arbitration award was allowed, although the trial court erroneously interpreted that it had been encompassed within the arbitrator’s decision. The Minnesota Court of Appeals ruled that the arbitrator did not decide the issue of post-award interest, which is mandatory under Minn. Stat. §549.09, and remanded for determination of interest on the entire award. Seagate Technology, LLC, v. Western Digital Corp., 2016 Minn. App. LEXIS 96 (Minn. App. 2016) (unpublished).

The non-solicitation agreement; ambiguity warrants trial. The dismissal of a claim for breach of a non-solicitation confidentiality agreement was overturned on grounds that the non-solicitation provision in the employment contract was ambiguous and the confidentiality clause raised genuine issues of material fact. The court of appeals ruled that the lower court erred in ruling, as a matter of law, that the employment agreement did not apply to securities that were sold by the employee from the company’s premises as a representation of a third-party broker dealer, and remanded the case for further consideration. Anchor Bank, N.A., v. Gulbransen, 2016 Minn. App. LEXIS 100 (Minn. App. 2016) (unpublished).

•  Negligent hiring, retention; hiring claim dismissed, retention actionable. Dismissal of a claim of negligent hiring by an employee of a trucking company injured by a driver was upheld, but a related claim of negligent retention of the driver was improperly dismissed. The appellate court ruled that there was insufficient evidence to hold the employer responsible for knowing of the employee’s violent propensities when it hired him, which warranted dismissal of the hiring claim. But there was sufficient evidence to overturn the dismissal of the claim of negligent hiring. Additionally, the employer’s insurance company was allowed to intervene in the action because it was not adequately represented in the case. But a claimed Miller-Shugart settlement agreement was properly dismissed because there was no enforceable agreement. Therefore, the case was remanded for determination of the negligent retention part of the lawsuit. Hartfiel v. Allison, 2016 Minn. App. LEXIS 93 (Minn. App. 2016) (unpublished).

•  Unpaid wages; penalty reversed. A penalty for nonpayment of wages under Minn. Stat. §181.13(a) was reversed because the unpaid wages were not covered by the statute. The court of appeals held that per diem payments do not constitute “wages” under the statute for purposes of imposing a statutory fine. Schreader v. D, C & D Enterprises, LLC, 2016 Minn. App. LEXIS 185 (Minn. App. 2016) (unpublished).

FELA, judgment for employee overturned. A judge’s decision overturning a jury verdict that a railroad was not liable for an employee’s injuries under the Federal Employee’s Liability Act (FELA), was reversed by the court of appeals. The evidence was sufficient to show that the employee’s own negligence caused his injuries from years of heavy lifting necessitating a hip replacement. Nichols v. Soo Line R.R., 2016 Minn. App. LEXIS 182 (Minn. App. 2016) (unpublished).

Unemployment compensation; absence policy upheld. An employee was properly denied unemployment compensation benefits because she was fired due to “misconduct” for failure to adhere to her employer’s absence policy. The appellate court, following a long line of cases, upheld the validity of the absence policy, which warranted the employee’s termination and denial of benefits. O’Quinn v. Noodles & Co., 2016 Minn. App. LEXIS 88 (Minn. App. 2016) (unpublished).

Unemployment compensation; failure to confer with boss. An employee’s refusal to meet with her general manager, after requesting a reduced work schedule, constituted grounds for discharge and denial of unemployment benefits. The appellate court held that the employee’s refusal to meet with the boss or respond to his reasonable request constituted disqualifying “misconduct.” Vue v. Surdyk’s Flights, Inc., 2016 Minn. App. LEXIS 102 (Minn. App. 2016) (unpublished).

LEGISLATION

Legislation has been introduced at the Minnesota Legislature to require employers to provide up to 12 weeks of paid family and personal sick leave. The measure, supported by a coalition of DFL legislators, would provide about 135,000 Minnesota workers with up to 460 weeks in annual payments for a state-run insurance program, as well as to care for sick family members or care for newborn or newly adopted children. The fund would come jointly, from employers and employees, costing the average worker about $1.70 per week. Gov. Mark Dayton has proposed a similar program for about 35,000 state government employees. Both proposals are modeled after the Federal Family & Medical Leave Act (FMLA), which provides unpaid leave to employees of companies with 50 or more employees. The proposed cases come at a time when the two largest cities in the state, Minneapolis and St. Paul, are examining various mandatory sick leave proposals for private sector employees.

—Marshall H. Tanick

Hellmuth & Johnson, PLLC

ENVIRONMENTAL LAW
JUDICIAL LAW

On rehearing, 8th Circuit again upholds Minnesota regional haze plan for EGUs. In March the U.S. Court of Appeals for the 8th Circuit vacated its decision of 1/21/2016, which upheld EPA’s approval of Minnesota’s regional haze plan for five electric-generating units (EGUs) whose emissions affect visibility in Minnesota’s two Class I federal areas: the Boundary Waters Canoe Area Wilderness and Voyageurs National Park. (For an overview of the decision, please see last month’s column.) On rehearing, the court reached the same determination and issued an almost identical opinion to its original January 21 opinion. National Parks Conservation Ass’n v. McCarthy, ___ F.3d ___2016 (8th Cir., 3/10/2016).

Minnesota district court declines to extend limited NEPA cause of action to Section 4(f). In February the United States District Court for the District of Minnesota granted the Metropolitan Council’s motion to dismiss challenges to a proposed light rail transit route—the Southwest Light Rail Transit (SWLRT) project—that would connect downtown Minneapolis to the southwestern Twin Cities. In so doing, the court declined to extend a limited National Environmental Policy Act (NEPA) cause of action it had recognized in a 2015 decision, also involving the SWLRT, to the related context of historical property review under Section 4(f) of the Department of Transportation Act of 1966. 49 U.S.C. §303. Plaintiffs in the case alleged that the Met Council violated NEPA, Section 4(f), and Minn. Stat. §473.3994 (Municipal Consent Statute) by selecting a preferred route for the SWLRT and initiating the municipal consent process before final environmental review for the project was complete and without conducting a Section 4(f) analysis of a wooded parkland area in Minnetonka commonly referred to as Opus Hill.

The responsible governmental agencies for the project’s environmental review are the Met Council and the Federal Transportation Agency (FTA). An environmental impact statement (EIS) is required for the SWLRT project under NEPA, and in October 2012, the Met Council and FTA published a draft environmental impact statement (DEIS) designating a preferred route for the rail line. The route would run through Opus Hill, about 90 feet west of the Claremont Apartments in Minnetonka. The DEIS included a draft Section 4(f) evaluation assessing historic properties and public areas affected by the proposed SWLRT route, but the analysis did not address Opus Hill. In the summer of 2014, pursuant to the Municipal Consent Statute, the city of Minnetonka approved the SWLRT proposal and entered a memorandum of understanding (MOU) with the Met Council. The MOU provided that it memorialized “the Parties’ present intentions and understandings” but did not “limit the alternatives or mitigative measures that the Council may undertake in the development and construction of the SWLRT Project.” Finally, in May 2015, the Met Council and FTA published a supplemental draft EIS (SDEIS) to address certain changes to the project. The SDEIS did not alter the portion of the proposed route through Opus Hill and did not include a Section 4(f) analysis for Opus Hill. The NEPA process is ongoing; the Met Council and FTA have not yet issued a final EIS (FEIS) for the project.

In a very similar case from last year involving a challenge to the SWLRT project, Lakes and Parks Alliance of Minneapolis v. Federal Transit Administration (LPA I), 91 F. Supp. 3d 1105 (D. Minn. 2015), the court had held that, although NEPA challenges under the federal Administrative Procedure Act (APA) generally cannot be brought prior to a final agency decision (e.g., a “record of decision”), a limited cause of action exists under NEPA itself (not the APA) against a state actor where a party seeks to preserve federal rights under NEPA pending the outcome of federal procedural review. In LPA I, the court concluded that the plaintiffs had pled sufficient facts to survive a motion to dismiss, presenting “significant allegations” in their complaint regarding how the Met Council, through the Municipal Consent process and through specific dealings and agreements with various municipalities, had dramatically reduced the number of realistically available routes for the SWLRT, despite the ongoing environmental review process.

In this case, by contrast, the court found that the plaintiffs simply relied upon the facts that the Met Council had initiated the municipal consent process and selected a preferred alternative prior to completing the FEIS. These allegations lacked the kind of specific facts presented in LPA I. The court emphasized that NEPA anticipates some preapproval with state and local bodies; the limited cause of action recognized in LPA I only comes into play where plaintiffs can show that agency actions have the practical effect of foreclosing potential options prior to conclusion of the environmental review process.

The court also rejected the plaintiffs’ claims under Section 4(f). Like NEPA, Section 4(f) does not provide an independent cause of action; judicial review is available only through the APA and only following final agency action. In spite of the fact that the Met Council and FTA have not yet completed the NEPA and section 4(f) processes, the plaintiffs argued that the court should recognize a similar limited pre-final-decision cause of action under Section 4(f), as it did for NEPA in LPA I, where agency actions are effectively limiting the potential outcomes of the Section 4(f) process. However, the court declined to do so, citing differences between NEPA and section 4(f)—e.g., the unique NEPA regulation relied upon in LPA I that prohibits any action that would “[l]imit the choice of reasonable alternatives” prior to completion of the environmental review process (40 C.F.R. § 1506.1(a))—and the lack of case law in other jurisdictions recognizing such a cause of action under Section 4(f). Opus Woods Conserv. Ass. & SFI Ltd. Partnership v. Metropolitan Council, No. 15-1637 (D. Minn. 2/25/2016).

ADMINISTRATIVE ACTION

Governor Dayton announces appointments to MPCA Citizen Advisory Committee. Minnesota Gov. Mark Dayton, on 2/23/2016, announced the eight members comprising the Governor’s Committee to Advise the Minnesota Pollution Control Agency (MPCA). Dayton created the committee by executive order in August 2015 following the Minnesota Legislature’s June 2015 bill to terminate the MPCA Citizens’ Board. For almost four decades, the board served as the agency’s ultimate decision-making body, instead of the MPCA commissioner, on various important environmental decisions.

By contrast, the new governor’s committee plays an advisory role only; it is charged with “advis[ing] the commissioner of the MPCA prior to final decisions on matters that are within the scope of the MPCA’s statutory authority, including but not limited to: environmental review, permitting, rulemaking, and variances to existing rules.” Minn. Gov. Dayton, Exec. Order 15-15, Creating the Governor’s Committee to Advise the Minnesota Pollution Control Agency (8/4/2015). “As regulators make decisions, and enforce our state’s environmental protection laws,” Dayton wrote in the press release announcing the newly appointed governor’s committee members, “Minnesota citizens need and deserve a seat at the table.” The committee members, whose initial terms expire in April 2019, are as follows (biographies provided by the governor’s office):

Craig Acomb: Acomb is the current president and CEO of the Institute for Clinical Systems Improvement (ICSI), an independent, nonprofit health care improvement organization composed of three major health plans and more than 50 medical groups representing 9,000 physicians. Previously, he was an assistant commissioner and former CFO at the Minnesota Department of Health. Acomb is a member of the Board of Trustees for the National MS Society – Upper Midwest Chapter and the Education Advisory Council for HealthPartners Institute.

 Amira Adawe: Adawe is a planner and health educator of family health and community engagement at Saint Paul – Ramsey County Public Health, where she plans the maternal/child health policy initiatives and develops their community engagement strategy. She has previously served at Saint Paul – Ramsey County Public Health as a health educator in the Community Health and Child/Teen Checkups programs. Adawe is a founding member and co-chair of the Somali Health Coalition and a member of the Metro Refugee Health Group Task Force.

 Cortney Amundson: Amundson is the founder and director of Mindful Restoration, LLC, which provides eco-therapy to individuals and groups by contracting with organizations such as the Wounded Warrior Project and the Department of Veteran Affairs. Previously, she was the supervisor of the military specific program at the Domestic Abuse Project and served a four-year enlistment as a nondestructive inspection technician with the United States Air Force. Additionally, Ms. Amundson provides therapy to individuals and families at Secure Base Counseling Center.

 Kurt Anderson: Anderson is the manager of the Environmental & Land Management Department for ALLETE, where he is responsible for the implementation and compliance of air, water, solid waste, and land management regulations. Previously, he was the operations manager at ASci Corporation, a toxicology lab with a wide range of domestic and international clients. Anderson is a member of the MPCA Sulfate/Wild Rice Advisory Panel, the Minnesota Chamber of Commerce, and the Electric Power Research Institute.

Dr. Rebecca Forman: Dr. Forman is a senior analyst at Merjent, Inc., where she prepares construction and industrial stormwater pollution prevention plans and supervises construction stormwater inspectors. Additionally, she is an adjunct professor in the University of Minnesota’s Department of Bioproducts and Biosystems Engineering, an instructor for the Erosion and Stormwater Management Certification program, and is certified as a senior ecologist by the Ecological Society of America. Previously, Dr. Forman was a project scientist for Braun Intertec Corporation and an adjunct professor of biology at the University of St. Thomas.

Nathaniel Hultgren: Hultgren is the agronomy director for Meadow Star Dairy, where he serves as a liaison between the dairy development and local farmers. He is also the chief executive officer of Hultgren Farms, a 5,000 acre specialty crop farm, and previously was the chief financial officer of the Bird Island Bean Company. He is a member of the Heritage Bank Community Advisory Committee and a past member of the Hawk Creek Country Club Board of Directors and the Willmar Airport Planning Commission.

Norman Miranda: Miranda is a senior technical advisor with HR Green Company, where he consults with the Central Iron Range Sanitary Sewer District as its executive director and served the City of Minneapolis Public Works Department as a wastewater conveyance/collection system manager. Previously, he was a water/wastewater business development manager with HDR Engineering, Inc. and the president/chief executive officer/chairman of OES Environmental Services. Miranda is a member of the Minnesota Wastewater Operators Association and the Water Environment Federation.

 Ted Winter: Winter is a licensed insurance agent with Farmers Union Insurance, where he sells and services property, casualty, life, accident, and health insurance policies in southwest Minnesota. Previously, he served 16 years in the Minnesota House of Representatives, including two years as House majority leader. Additionally, he owns and operates a 250-acre crop farm and is a member of the Lions Club, the Land Stewardship Project State Policy Committee, and the Minnesota Farmer’s Union, where he serves as county president for Nobles and Rock Counties.

–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.

FEDERAL PRACTICE
JUDICIAL LAW

Citizenship of real estate investment trust determined by reference to its shareholders. In a brief, unanimous opinion, the Supreme Court held that for purposes of diversity jurisdiction, the citizenship of a real estate investment trust is to be determined by the citizenship of its shareholders. Americold Realty Trust v. ConAgra Foods, Inc., ___ S. Ct. ___ (2016).

Denial of counsel’s motion to withdraw is an immediately appealable collateral order. The 8th Circuit joined every other circuit to have considered the issue, and held that the denial of an attorney’s motion to withdraw is a collateral order subject to immediate appeal under 28 U.S.C. §1291. The 8th Circuit also found that then-Chief Judge Davis abused his discretion in denying counsel’s motion to withdraw where counsel had not been paid and the client had not cooperated with its defense, where there was no evidence that the client or any third party would be prejudiced by the withdrawal. Sanford v. Maid-Rite Corp., ___ F.3d ___ (8th Cir. 2016).

•  Unaccepted offer of judgment does not moot class claims. Last month, this column noted that Supreme Court’s decision in Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663 (2016), which held that an unaccepted offer of judgment does not moot putative class action claims, but also hinted that the outcome might be different “if a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.”

Magistrate Judge Noel recently rejected what appears to have been the first attempt in the District of Minnesota to take advantage of this apparent exception, rejecting the defendant’s motion to deposit funds with the Court, finding that there was “no purpose in the deposit defendant seeks to make other than to moot the case,” and that the plaintiff was first entitled to a “fair opportunity to show that class certification is warranted.” Yaakov v. Varitronics, LLC, 2016 WL 806703 (D. Minn. 3/1/2016).

E-discovery; recovery of related costs under 28 U.S.C. §1920. Denying the prevailing defendant’s motion for review of a cost judgment, Judge Davis joined the majority of courts to consider the issue and found that the costs associated with file conversion for e-discovery were analogous to the costs associated with making copies, and could therefore be recovered under 28 U.S.C. §1920, but that the costs associated with the collection, preservation, processing and indexing of electronically stored information were not recoverable costs. Associated Elec. & Gas Ins. Servs. v. BendTec, Inc., 2016 WL 740409 (D. Minn. 2/24/2016).

Jus tertii standing; discovery of personally identifying information. Reversing an order by Magistrate Judge Mayeron, Chief Judge Tunheim found that the defendant website had “jus tertii” standing to assert the 1st Amendment rights of pseudonymous posters to the website, that the plaintiff’s request for information relating to the posters’ IP addresses constituted a request for personally identifying information which implicated the posters’ 1st Amendment rights, and that the plaintiff was required to make “reasonable efforts” to notify the posters of the dispute and afford them the opportunity to seek to quash the discovery. East Coast Test Prep LLC v. Allnurses.com, Inc., 2016 WL 912192 (D. Minn. 3/7/2016).

Motion to strike granted; attorney’s fees and costs awarded. Where the plaintiffs’ opposition to the defendant’s motion for summary judgment included an affidavit from plaintiff’s counsel’s brother, who had never been disclosed as a person “likely to have discoverable information” under Fed. R. Civ. P. 26(a)(1), Judge Magnuson granted the defendant’s motion to strike the affidavit and awarded the defendant its attorney’s fees and costs associated with its motion under Fed. R. Civ. P. 37. Disability Support Alliance v. Heartwood Enters., LLC, 2016 WL 740411 (D. Minn. 2/24/2016).

How not to request attorneys’ fees. The plaintiffs sought to recover more attorneys’ fees under the fee-shifting provision of the RFRA. One law firm representing the plaintiffs sought more than $22,000 for more than 55 hours of work, and supported its application with a four-page declaration from its lead attorney. However, that law firm failed to provide any documentation to support the reported number of hours worked. Not surprisingly, Chief Judge Tunheim concluded that “[w]ithout the benefit of any billing or time records,” he was “unable to ascertain whether [the law firm’s] requested fees reflect a reasonable amount of time expended,” and further noted that without that documentation “the defendants are unable to lodge particularized objections to the estimate.”

But instead of completely rejecting that fee application, Chief Judge Tunheim denied the request for attorney’s fees without prejudice, and allowed 30 days for the plaintiffs to refile that portion of their motion for attorney’s fees, with supporting documentation. Hall v. Sebelius, 2016 WL 424965 (D. Minn. 2/3/2016).

—Josh Jacobson

Law Office of Josh Jacobson

INDIAN LAW
JUDICIAL LAW

•  Trust responsibility; special relationship between tribes and U.S. does not override statute. Under the Indian Self Determination Act (ISDA), tribes may contract with federal agencies to take control of a variety of federally funded programs. The ISDA declares Congress’s “commitment to the maintenance of the Federal Government’s unique and continuing relationship with, and responsibility to, individual Indian tribes and to the Indian people as a whole[.]” 25 U.S.C. §450a(b). Contracting tribes are eligible to receive the amount of money that the government would have otherwise spent on the program plus reimbursement for reasonable administrative overhead, termed “contract support costs.” The ISDA imports the Contract Disputes Act (CDA) dispute-resolution provisions, which include a six-year statute of limitations.

Tribal contractors have repeatedly complained—including in a 1990 class action and 2001 putative class action—that the federal government has not honored its obligation to pay contract support costs. After class status in the 2001 case was denied, the Menominee tribe sued separately for its own contract-support claims for contract years 1995-2004. The district court dismissed the claims for 1995-1998 as time-barred.

The Supreme Court agreed, emphasizing that the U.S. trust relationship with tribes is “governed by statute rather than the common law.” It held, inter alia, that because the ISDA points directly to the CDA—including the CDA’s six-year presentment deadline—to resolve disputes, the unambiguous statutes control, regardless of the “general trust relationship.” The ISDA’s statement of congressional commitment did not overcome the six-year limitation. Menominee Indian Tribe of Wisconsin v. United States, 136 S.Ct. 750, ___ U.S. ___ (2016).

Indian gaming; scienter not required to violate Indian Gaming Regulatory Act. The Indian Gaming Regulatory Act (IGRA) requires National Indian Gaming Commission (NIGC) approval of all contracts to operate gaming activities at tribal casinos (termed “management contracts”). IGRA places strict payment limits on management contracts, including specifying that management contractors cannot collect more than 30% (or in some cases 40%) of the net casino revenues. IGRA further requires tribes to maintain the “sole proprietary interest” in the gaming activities.

Bettor Racing contracted to operate a pari-mutuel betting business with a tribal casino. After the NIGC approved the management contract, the parties modified the contract to pay Bettor Racing more than 40% of net revenues. The NIGC found that Bettor Racing violated IGRA by: (1) managing a tribal gaming operation without an approved management contract; (2) operating under unapproved modifications; and (3) holding a proprietary interest in the pari-mutuel betting operation, and fined Bettor Racing $5 million.

The 8th Circuit affirmed the fine, rejecting Bettor Racing’s defense that it believed that the tribe had secured NIGC approval. It reasoned that the Act’s plain language requires no scienter and instead imposes strict liability on unapproved management contractors. Bettor Racing, Inc. v. National Indian Gaming Commission, ___ F.3d ___, 2016 WL 362285 (8th 2016).

Criminal jurisdiction; tribal court simple assault is predicate offense. The United States prosecuted a defendant under a habitual-offender statute, 18 U.S.C. 117, relying in part on a 2002 tribal-court conviction for simple assault. The defendant argued that the federal habitual-offender conviction could not stand because the tribal court conviction was for attempt, not assault. The 8th Circuit upheld the federal conviction, reasoning that the statute allowed “any assault” as a predicate offense, and that common-law assault readily embraces attempt-based assaults like the tribal-court conviction. U.S. v. Harlan, ___ F.3d. ___, 2016 WL 611832 (8th Cir. 2016).

Criminal jurisdiction; tribal public safety officer was “federal officer.” The United States charged a defendant with one count of assault of a federal officer after the defendant struck a tribal officer who was responding to a report of a violation of tribal law on the tribe’s reservation. The defendant sought to overturn the conviction, arguing that the tribal officer was not a federal officer within the meaning of 18 U.S.C. 111. The 8th Circuit disagreed and upheld the conviction. It reasoned that the Bureau of Indian Affairs (BIA) has responsibility for law enforcement in Indian country, and tribal officers operating under contracts with the BIA act under both the tribe’s inherent authority and delegated federal authority. The officers are accordingly afforded the same protection under 18 U.S.C. 111 as BIA employees. U.S. v. Janis, 810 F.3d 595 (8th Cir. 2016).

Criminal jurisdiction; certificate of degree of Indian blood admissible. To sustain certain assault charges, the United States had to prove that the defendants were Indians, which the 8th Circuit defines as a person who “(1) has some Indian blood, and (2) is recognized as an Indian by a tribe or the federal government or both.” To establish this element of the charge, the United States called a Bureau of Indian Affairs official whose office certifies blood quantum. The official testified that his office had prepared for each defendant a certificate entitled “Certified Degree of Indian Blood,” and that both certificates stated “I hereby certify that the above named individual is an enrolled member of the Standing Rock Sioux Tribe.” An enrollment clerk signed both certificates. The defendants argued that the testimony violated the 6th Amendment’s confrontation clause because the official testified instead of the clerk. The 8th Circuit disagreed and upheld the convictions, reasoning that the certificates were business records outside the scope of the confrontation clause. U.S. v. Rainbow, ___ F.3d ___, 2016 WL 683113 (8th Cir. 2016).

Federal law applicability; Title VII civil rights claims against tribal enterprise dismissed. The district court dismissed plaintiffs’ Title VII claims against a tribal casino for lack of subject matter jurisdiction for two reasons. First, the court noted that by its express terms, the civil-rights statute does not apply to tribes. The 8th Circuit has interpreted this exception to include tribal businesses. Second, the casino shares the tribe’s immunity from suit, and because the casino had not waived that immunity, no suit could lie. The court accordingly dismissed the suit for lack of jurisdiction. Nawls v. Shakopee Mdewakanton Sioux Community Gaming Enterprise—Mystic Lake Casino, Case No. 15-2769, 2016 WL 593514 (D. Minn. 2/2/2016).

—Jessica Intermill

—Peter Rademacher

Hogen Adams PLLC

PROBATE & TRUST LAW
ADMINISTRATIVE ACTION

IRS issues proposed regulations regarding consistent basis reporting. The IRS released temporary and proposed regulations to provide additional guidance regarding basis consistency and information reporting requirements of new IRC sections 1014 and 6035 on March 2, 2016. The Federal Taxation Committee of the MSBA’s Probate & Trust Law Section monitors and reports on federal legislation and IRS rules that impact the practice of estate planning. These regulations are discussed in the March 2016 update located at http://bit.ly/1RgHgGJ

—Robin Tutt

Lindquist & Vennum LLP

REAL PROPERTY
JUDICIAL LAW

Landlord-tenant; equitable subrogation. The Minnesota Supreme Court held that a landlord could not proceed on a subrogation claim against tenants that caused fire damage to the landlord’s building to the extent that the claim is for repair of units other than those leased by the at-fault tenant. The lease stated in relevant part that the tenant “shall reimburse [the landlord] for . . . [a]ny loss, property damage, or cost of repair or service . . . caused by negligence or improper use by” the tenant. The district court dismissed the claim against the tenant because this provision did not specifically enumerate fire loss nor specifically allocate the risk of loss to other parts of the building to the tenant. The court of appeals and Supreme Court interpreted the provision otherwise, holding that the risk allocation provision was very broad, and emphasized the use of the word “any.” However, the Supreme Court read the provision to apply only to the defined term “apartment,” even though that term was not used or referred to in the “any loss” clause of the risk allocation provision. The Court noted that the “vast majority” of the tenants’ obligations related solely to the apartment. The Court therefore refused to extend the lease provision to make tenants responsible for damage to units other than the one the negligent tenant leased. Melrose Gates, LLC v. Moua, No. A14-1131, 2016 WL 626052, ___ N.W.2d ___ (Minn. 2016).

Mortgage; RESPA; quiet title. Owners of foreclosed residential property sued Wells Fargo and law firm representing Wells Fargo in the foreclosure. The homeowners fell behind on payments and explored modification options with Wells Fargo, of which none were acted upon by either party, apparently partly due to the fault of the homeowners and partly due to miscommunication by Wells Fargo. Wells Fargo moved to dismiss all four amended claims of breach of contract, breach of the duty of good faith, negligent misrepresentation, a RESPA violation, quiet title, and declaratory judgment. Owners first alleged that the boilerplate “governing law” provision incorporated RESPA and the Minnesota Homeowner’s Bill of Rights, a violation of which causes a breach of contract. The Minnesota Federal District Court noted that the 8th Circuit has not addressed this argument, but held that other courts around the nation have rejected the argument that statutory violations give rise to a breach of contract. The court held that the mortgage must include specific references to statutes or regulations for violations of those laws to give rise to a breach of contract.

Second, the homeowners alleged violations of RESPA because Wells Fargo failed to respond to inquiries, provided inaccurate information, and proceeded to foreclosure without properly considering possible loss mitigation options. The homeowners’ claims were based on RESPA’s implementing regulations, 12 C.F.R. §§1024.38 and 1024.41. The Court held that §1024.38 does not create a private cause of action, consistent with the holdings of several other cited federal district court opinions from around the nation. The Court dismissed the §1024.41 claim because the homeowners did not plausibly allege that Wells Fargo failed to exercise reasonable diligence in obtaining information from the homeowners for purposes of considering loss mitigation options. Finally, with regard to the quiet title claim, the homeowners alleged that the foreclosure sale is invalid because the mortgagor’s legal name differed from the name used in the mortgage and the notice of foreclosure. The court dismissed the claim on the grounds that the foreclosure by advertisement statute requires only the name as it is stated in the mortgage, and does not require an independent verification of a mortgagor’s legal name. Anderson v. Wells Fargo Home Mortgage, No. 14-5013, 2016 WL 755615 (D. Minn. 2/25/2016).

ADA, MHRA. The Minnesota Federal District Court issued three closely related opinions, notable for their divergence, in cases brought by individual disabled plaintiffs and the Disability Support Alliance (DSA) against property owners throughout the state for failures to make their properties accessible to people with disabilities. In each of the cases, the courts found that the individual plaintiffs had standing to bring claims that certain real property was inaccessible to them in violation of the Americans with Disabilities Act and the Minnesota Human Rights Act. However, the opinions diverged on whether the DSA had standing to pursue the claims on behalf of their members. In the first opinion, Heartwood Enterprises, LLC, the Court held that the DSA failed the third prong of association standing because the claims required individualized proof and therefore the participation of individual DSA members.

In the second opinion, Billman, the court held that accessibility claims do not require the presence of particular DSA members. In the third opinion, the court held the DSA satisfied the third prong because the relief sought would inure to all members and would therefore not require individual participation. All three court opinions dismissed bias claims under the MHRA. In the case involving Heartwood, the court dismissed the MHRA bias claim because of and after concluding that removing architectural barriers such as stairs is not readily achievable. In the case involving Billman, the court instead dismissed the MHRA bias claim by first requiring a state of mind element that the property owner intended to exclude people with disabilities because of their disabilities, and then concluding that the plaintiffs had not pled facts regarding the property owner’s state of mind.

In Monali, Inc., the court dismissed the MHRA bias claim on Twombley grounds, and refused to decide whether the claim requires allegations regarding the property owner’s state of mind. Only the Heartwood Enterprises decision evaluated the merits of the ADA/MHRA claims. The court held that the plaintiffs did not provide evidence that removing the architectural barriers was readily achievable. Disability Support Alliance v. Monali, Inc., No. 15-CV-1522; 2016 WL 868174 (D. Minn. 3/4/2016) (adopting Magistrate Leung’s Report and Recommendation at 2016 WL 859442 (D. Minn. 2/12/2016)); Disability Support Alliance v. Billman, No. 15-CV-3649, 2016 WL 755620 (D. Minn. 2/25/2016); Disability Support Alliance v. Heartwood Enterprises, LLC, No. 15-CV-529, 2016 WL 740411 (D. Minn. 2/24/2016).

—Joseph P. Bottrell

Meagher & Geer, PLLP

TAX
JUDICIAL LAW

Individual income tax: “Frivolous” argument. Taxpayer appealed the tax court’s order finding that he owed additional income taxes and penalties. In a per curium opinion, the 8th Circuit vacated the order, and remanded to the tax court. The taxpayer had challenged the notice of deficiency (NOD) by arguing that the notice had not been issued by a duly authorized delegate of the Secretary of the Treasury. The taxpayer made other arguments relating to the jurisdiction of the tax court. The tax court concluded that the case did not involve the legitimacy of the NOD and that the taxpayer’s jurisdictional argument was frivolous. The sole issue raised on appeal is whether the tax court lacked subject matter jurisdiction in light of his challenge to the legitimacy of the NOD. The 8th Circuit determined that the tax court erred by declining to address the legitimacy of the NOD. Although there was a trial, the 8th Circuit further concluded that the undeveloped record did not establish that the signatory of the NOD occupied a position that gave her the requisite authority to issue the NOD. The court therefore vacated the tax court memorandum and order, and remanded. Muncy v. Comm’r, No. 15-1626, 2016 WL 805692 (8th Cir. 3/2/2016).

Individual income tax: Determination of residency. Concluding that the tax court erroneously interpreted Minnesota’s residency statute, the Minnesota Supreme Court reversed the tax court and held that a taxpayer couple who had claimed to be part-year residents were instead properly considered full-year residents. At issue in the case was how to determine residency for individuals domiciled for only part of a year in the state. Minnesota “residents” are taxed on all of their income; income is allocated differently for individuals who reside in Minnesota for only part of the year (and nonresidents). For example, non-residents and part-year residents are taxed on only a portion of any partnership, S corporation, trust, or estate income. The precise issue in dispute was whether an individual could be a “resident” when that person is domiciled both “in Minnesota” and “outside the state” during a given tax year. The Court determined first that the statute was ambiguous on that point, and then went on to analyze legislative intent by considering the statute’s purpose and a longstanding agency interpretation that is entitled to deference. The Court held that the statute allows the commissioner to count all the days a taxpayer is physically present in Minnesota to determine whether the taxpayer is a “resident” as defined in Minn. Stat. §290.01, subd. 7(b), including days spent in the state as a domiciliary. The dissenting justices disagreed that the statute was ambiguous, and would have upheld the tax court’s interpretation of the statute. The “plain and unambiguous language of the statute,” the dissent reasoned, does not permit the commissioner of Revenue to treat part-year Minnesota residents as full-year taxable residents under the physical-presence test in Minn. Stat. §290.01, subd. 7(b) (2014). Marks v. Comm’r, No. A15-1145, 2016 WL 639868 (Minn. 2/17/2016).

Sales & use tax: Audit errors in estimated alcohol sales. Blarney’s Pub & Grill, located near the University of Minnesota, was audited for the tax year of 2009. The auditor’s errors resulted in a large discrepancy between the auditor’s estimated sales of alcohol and Blarney’s reported sales. The errors resulted from the auditor’s miscalculations and misrepresentations of the pricing of alcohol and Blarney’s use of discount nights and happy hours. The auditor estimated alcohol sales in 2009 at $1,808,357 while Blarney’s reported sales of $707,654. Further, the auditor estimated that Blarney’s had purchased $1,981,365 in alcohol, while Blarney’s actual purchases totaled $277,971.

Blarney’s appealed, resulting in a recalculation of the sales tax. The commissioner’s recalculation used an industry standard for bars that a dollar spent on alcohol should produce $2.30 in revenue, while a full restaurant should make $4.50 on every dollar. The first audit estimated that Blarney’s made nearly $7 on each dollar spent on alcohol. Due to these discrepancies, the commissioner found that the assessment was incorrect. More Inc. v. Commissioner of Revenue, Docket No. 8395–R 2016 WL 715004 (Minn. T. Ct. 2/19/2016).

Sales & use tax: Procedure and statute of limitations. In 2014, months after discovery of Blarney’s Pub & Grill’s appeal from the above audit, the commissioner sent Blarney’s two documents, “Computation of Tax, Penalty, and Interest by Period” and “Explanation of Adjustments.” These documents significantly lowered the assessed taxes that Blarney’s owed, while asserting that Blarney’s had not paid these taxes. Because the statute of limitations for assessment had long expired, Blarney’s moved in limine to bar these additional taxes. Blarney’s asserted the documents were “orders” from the commissioner and therefore unenforceable because it was past the statute of limitations. The court, upon reconsideration, found that the documents were not orders because they were not signed by the commissioner or her delegate. Therefore, the court granted the commissioner’s motion for reconsideration. More Inc. v. Commissioner of Revenue, Docket No. No. 8395–R, 2016 WL 770064 (Minn. T. Ct. 2/19/2016.).

Property tax: ‘Green Acres’ status denied. STRIB IV, LLC challenged the county’s denial of its application for a favorable tax treatment under Minn. Stat. §273.111, known as “Green Acres.” The statute mitigates property tax by using an agricultural value instead of estimated market value. Along with other qualifications, the statute limits tax deferments to “parcels owned by individuals” unless one of the following exceptions apply: a family farm; an entity that is not regulated under §500.24 (farming by business organizations), in which a majority of the members are related and at least one member either resides on the land or actively operates the land; and corporations that derive 80 percent or more of their gross receipts from the wholesale or retail sale of horticultural or nursery stock. STRIB IV is not an individual or one of the exemptions specified. The court rejected STRIB’s argument that its federal status as a disregarded entity (DRE) should be used to determine its eligibility for the Green Acres statute, holding that DRE treatment under Minnesota law is limited to chapters 290 and 289A. Because tax exemptions are strictly construed and STRIB IV did not fit any of the exemptions, the court upheld the county’s denial of Green Acres treatment to the subject property. STRIB IV, LLC. v. County of Hennepin, Docket No. 27–CV–12–11344 2016 WL 561916 (Minn. T. Ct. 2/8/2016).

—Morgan Holcomb

—Jessica Voigt

Mitchell Hamline School of Law

TORTS & INSURANCE
JUDICIAL LAW

Equitable subrogation—landlord/tenant. Defendant tenant leased one apartment in a 36-unit building. The lease covered a variety of topics, including liability for damage to property. Later, a fire caused by tenant’s negligence caused damage to tenant’s unit and a neighboring unit. The trial court granted tenant’s summary judgment motion holding that the parties did not reasonably expect that tenant would be liable for losses. The court of appeals reversed and remanded.

The Minnesota Supreme Court affirmed the decision of the court of appeals in part and reversed in part. Applying a de novo standard of review, the Court held that the landlord’s insurer could seek recovery of damages to the tenant’s unit. The Court relied on language in the lease, which provided that tenants shall reimburse landlord for “[a]ny loss, property damage, or cost of repair or service… caused by negligence or improper use by [Tenant], his/her agents, family or guests.” The Court, however, held that the insurer could not seek recovery of damages caused to the neighboring unit because the language in the lease was limited to tenant’s unit.

Justice Lillehaug, joined by Justices Gildea and Anderson, dissented in part, arguing that an abuse of discretion standard applied to the district court’s order given that the claim was for equitable subrogation. Melrose Gates, LLC, v. Moua, No. A14-1131 (Minn. 2/17/2016). https://mn.gov/law-library-stat/archive/supct/2016/OPA141131-021716.pdf

—Jeff Mulder

Bassford Remele, A Professional Association

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