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.
Commercial and Consumer Law
• Extending Article 9’s reach. UCC §9-609(a) allows a secured party after default to take possession of the collateral, but under subsection (b) this must be done without a breach of the peace. Most secured parties, however, do not repossess themselves, but hire experienced persons to do the repossession. If such a third party breaches the peace, is that party liable? The answer in Minnesota is yes, even though the statute refers to a “secured party’s right” to take possession of collateral and a repossession agency is not a secured party, because the agency is acting on behalf of the secured party and this application of the law is necessary to prevent abuse and to discourage illegal conduct. Nelson v. BMW Financial Services NA, LLC, 88 U.C.C. Rep. Serv. 2d 417, 2015 WL 8328073 (D. Minn. 2015).
• Observation. The case implies that the secured party also is liable for agency action that breaches the peace. That is made clear by official comment 3 to §9-609: “…courts should hold the secured party responsible for the actions of others taken on the secured party’s behalf, including independent contractors engaged by the secured party to take possession of collateral.” Moreover, there may be liability in bankruptcy beyond the UCC. See, e.g., Johnson v. Credit Acceptance Corp., 165 F. Supp. 2d 923 (D. Minn. 2001). And perhaps under other law. See, e.g., Buzzell v. Citizens Automobile Finance, Inc., Remarketing Solutions, LLC, and Professional Recovery Services & Collections, Civ. No. 10-2046 (RHK/FLN) (D. Minn. 2011) (Fair Debit Collection Practices Act). See also Babbit Ford, Inc., v. Navajo Indian Tribe, No. 83-610 (U.S. Sup. Ct. 1983) (upholding tribal application of repossession statute to non-Indian that entered onto reservation) and Ware v. Moe, No. Civ. 03-2054 ADM/SJM, 2004 WL 848204 (D. Minn. 2004) (discussing pleading requirements for §1983 claim of liability for state action).
UCC §9-609 does not define “breach of the peace,” leaving the matter for continuing development by the courts. For a discussion, see McRobert, “Defining ‘Breach of the Peace’ in Self-Help Repossessions,” 87 Washington L. Rev. 569 (2012).
• Getting it right. A decade ago the New York Court of Appeals, in Regatos v. North Fork Bank, 838 N.E. 2d 629, 57 U.C.C. Rep. Serv. 2d 791 (N.Y. 2005), had to rule on whether the one-year statute of repose in UCC §4A-505, which precludes a customer from raising a problem with a funds transfer from the customer’s account more than one year after the customer received notice of it, could be reduced by agreement to less than a year—in the case, to 15 days. The court looked at §4A-204, which limits a customer’s loss to interest and not the amount of the funds transfer if the customer does not notify the bank of a problem with a funds transfer within a reasonable time not exceeding 90 days after the account was debited, and disallows variation by agreement, for guidance. The court also thought invalidating the attempted variation by agreement of shortening the time limit in §4A-505 would prompt banks to adopt and use commercially reasonable security procedures, which had not been complied with in the case.
There are several problems with the court’s analysis. First, §4A-501(a) provides a general rule that the rights and obligations of a party to a funds transfer may be varied by agreement, unless Article 4A otherwise provides. The Article does so provide in a number of situations, including in §4A-204, and in §4A-202(f), but not in §4A-505. One can assume, therefore, that the Legislature knew what it was doing. Second, while the policy justification of encouraging use of commercially reasonable security procedures is obviously one of Article 4A’s goals, the policy behind the lack of restriction on agreement in §4A-505 can be attributed to the equal goal of reducing the time to prompt recognition of improper transfers before too much harm to the overall system can occur due to the problem not being brought to the attention of the parties. Thus, in essence, the court substituted its more narrow policy for the Legislature’s broader policy.
More recently courts have read Article 4A as intended. In Felix d/b/a Han’s Laser Technology Co. v. Prosperity Bank, 2015 Tex. App. LEXIS 12773 (Tex. Ct. App. 2015), the deposit agreement required “prompt notification” within 60 days of when the monthly statements were made available. The customer ran past the 60 day agreement limit and, while there were other issues in the case, the bank was able to obtain a summary judgment and thus the opinion supports the enforceability of a contractual cutdown for reporting unauthorized wire transfers.
Interestingly, the Minnesota Court of Appeals came to the same conclusion as the Texas court more than a decade previously in Steffes v. Heritage Bank NA Willmar, 202 Minn. App. LEXIS 737, 48 U.C.C. Rep. Serv. 2d 287 (Minn. Ct. App. 2002) (involving improper disbursements from an account by wire transfer, and when the customer flunked the 30-day limitation period in the account agreement, the court enforced that limitation). See also Priority Staffing, Inc. v. Regions Bank, 2013 U.S. Dist. LEXIS 141436 (W.D. La. 2013) (enforcing 30 day limit).
Retired G.L. Cross Research Professor, University of Oklahoma
• Implied consent: No jurisdiction to consider untimely petition, but future use of revocation to enhance criminal charges may be challenged. In 2006, appellant was charged with fourth-degree DWI, received a license revocation notice, and did not file a petition for judicial review. His license was revoked in 2007 for that offense. In 2008, he was charged with third-degree DWI, again received a license revocation notice, did not file a petition for judicial review, and his license was again revoked. While both DWI charges were pending, the district court found him mentally incompetent to stand trial, and the charges were dismissed. In 2012, appellant was charged with felony DWI, felony DWI test refusal, and gross misdemeanor driving after cancellation. His 2007 and 2008 license revocations were used to enhance the DWI charges. In 2015, he filed a petition for judicial review of the 2007 and 2008 license revocations, arguing that his mental incompetency in the related criminal cases should result in the rescission of the driver’s license revocations. The district court found the petition untimely, and concluded that it was jurisdictionally barred from considering the petition.
Appellant argued that all revocation proceedings must satisfy the due process protections required in criminal prosecutions, because they may be used to enhance criminal charges. The Minnesota courts have rejected this argument. He also argues that the use of the revocations as criminal enhancements violates his due process rights because he was mentally incompetent during the 30-day period in which he could request judicial review of the revocations. The courts have held that this 30-day time period is jurisdictional. Although he did receive a notice and order of revocation, appellant argues that his mental incompetence prevented him from receiving adequate notice to seek judicial review. Actual notice is not required in an implied consent proceeding, so long as “notice of the opportunity to seek judicial review of a revocation is ‘reasonably calculated’ to reach the driver.” The state satisfied this requirement, so appellant’s due process rights were not violated. Because appellant received notice and did not file a petition within 30 days, the district court did not have jurisdiction to hear his petition.
Without expressing an opinion as to the outcome of the analysis, the court of appeals notes that district court must scrutinize whether the enhancement of criminal charges based on revocations that occurred when a petitioner was mentally incompetent to seek judicial review constitutes a violation of due process. This challenge, however, must be raised in the criminal, not implied consent, proceedings. David John Anderson v. Commissioner of Public Safety, Ct. App. 5/9/2016.
• DWI: Totality of circumstances properly evaluated in determining whether stop supported by reasonable, articulable suspicion. Appellant was charged with second-degree DWI after being pulled over for swerving and weaving over the centerline of the road when making a right-hand turn. Appellant sought to dismiss the charges, arguing there was no valid basis for the stop. The district court denied the motion, and appellant was found guilty after a stipulated facts trial. The court of appeals reversed, finding the stop of appellant’s vehicle invalid and finding that the right-hand turn statute (requiring that a right turn be made “as close as practicable to the right-hand curb or edge of the roadway,” Minn. Stat. §169.19, subd. 1(a)) was unconstitutionally vague unless narrowly applied to the facts of the case.
Held, the court of appeals erred by addressing the constitutionality of the right-hand turn statute, as neither party raised the issue in the district court or an appeal. The district court also properly assessed the totality of the circumstances of the stop, and correctly concluded that the stop was supported by reasonable, articulable suspicion. The stop was supported by the following circumstances: (1) the squad video supported the officer’s assertion that appellant’s right turn was not as close as practicable to the right-hand curb or edge of the roadway, (2) the squad video showed appellant’s car drifting in its lane, (3) the events occurred close to bar closing time, (4) appellant was leaving an area with bars, and (5) the officer’s training and experience. The second circumstance alone may justify a stop, and the remaining circumstances fortified the basis for the stop in this case. The court of appeals is reversed. State v. Tyler Thomas Devries Morse, Sup. Ct. 5/11/2016.
• DWI: Felony CVO is predicate felony for first-degree DWI. Appellant was convicted of felony criminal vehicular operation (CVO) for causing substantial bodily harm to another as a result of operating a motor vehicle while under the influence of alcohol in 1998. He was charged with two counts of first-degree DWI in 2015, which were enhanced based on appellant’s 1998 conviction. Appellant argues that his prior CVO conviction cannot be used to enhance his current DWI offense because the 1996 version of the CVO statute, in effect at the time of prior offense, is not listed as a predicate felony in the 2014 version of the first-degree DWI statute, in effect at the time of his current DWI offense.
The court of appeals finds that the 2014 first-degree DWI statute is ambiguous as to whether the 1996 CVO statute is a predicate offense, because it is subject to more than one reasonable interpretation. The court looks to changes made to the first-degree statute and legislative intent stated in the 2012 session law to resolve the ambiguity. A number of changes have been made to the CVO and the first-degree DWI statutes. The CVO statute was reorganized in 2007, and the Legislature attempted to track the changes by also amending the first-degree DWI statute in 2007. The 2007 version of the first-degree DWI statute referenced only the newly organized version of the CVO statute, and not the prior version. So, in 2012, the first-degree DWI statute was again amended to clarify the cross-referencing change made in 2007 relating to the CVO statute. The Legislature stated that its “intent has always been that [CVO] convictions under the pre-2007 law and post-2007 law be used for enhancing [DWI] penalties…” The CVO statute was renumbered again in 2014, and the first-degree statute was again amended to track this change, making it clear that the Legislature still intended that pre-2007 CVO convictions would constitute predicate felonies under the first-degree DWI statute.
Held, a prior felony CVO is a predicate offense under the first-degree DWI statute. As such, there was no manifest injustice in appellant’s guilty plea. State v. Ralph Joseph Boecker, Ct. App. 5/23/2016.
• Sentencing: Rules of evidence apply to Blakely court trials. Appellant entered a straight plea to conspiracy to commit a first-degree controlled substance crime. Prior to his plea, the state notified appellant of its intention to seek an upward durational departure based on three aggravating factors. At the plea hearing, appellant waived his right under Blakely v. Washington, 542 U.S. 296 (2004), to have a jury determine whether an upward durational departure was justified. At the Blakely court trial, the district court did not apply the rules of evidence, allowing the state to present its entire case through a single witness, one of the FBI case agents. The district court found all three aggravating factors were proved beyond a reasonable doubt, and imposed a greater than double upward durational departure. The court of appeals found that the rules of evidence apply only at a Blakely jury trial.
Rule 1101(b)(3) of the Minnesota Rules of Evidence provides that the rules do not apply at sentencing proceedings. A distinction was drawn in State v. Rodriguez, 754 N.W.2d 672 (Minn. 2008), between “sentencing” proceedings, and a “jury sentencing trial.” The Supreme Court held that the rules of evidence must be applied in the latter, because they are not listed as an exception in Rule 1101(b). The Court clarifies that Rodriquez was not intended to limit the application of the rules of evidence to only Blakely jury trials, noting that there is a substantive difference between an ordinary sentencing hearing and a sentencing trial where adjudicatory facts are determined. At a sentencing trial, aggravating sentencing factors must be proved beyond a reasonable doubt, as during the adjudication-of-guilt phase of the proceedings. During that phase, even if a jury is waived, the rules of evidence apply nonetheless to the bench trial.
Held, the rules of evidence apply to all Blakely trials, whether before a judge or a jury. However, because appellant did not object to the non-application of the rules of evidence before the district court, plain error analysis applies. Prior to this case, the Court had not clearly required the district courts to apply the rules of evidence in a Blakely court trial. Thus, the district court’s failure to apply the rules was not clear or obvious error. Although the district court erred, the error was not plain. State v. Julian Sanchez-Sanchez, Sup. Ct. 5/18/2016.
• Probation violation: Polygraph tests inadmissible as evidence of probation violation. In February 2010, appellant was placed on probation pursuant to a stay of adjudication following his plea of guilty to third-degree criminal sexual conduct. His probation conditions included the successful completion of sex offender treatment programming and submission to polygraph examinations. In February 2015, a probation violation report alleged appellant failed to complete sex offender treatment. At the probation revocation hearing, appellant’s therapist testified that appellant failed multiple polygraphs and was terminated from the program for failing to follow through with her recommendations. Appellant objected to the reference to the polygraph examinations, but the district court overruled the objections. The district court found that appellant violated probation by failing to complete outpatient treatment, revoked his stay of adjudication, entered a judgment of conviction, and imposed a sentence of 36 months, with all but 30 days stayed.
When a probation revocation proceeding results in the imposition of intermediate sanctions, rather than the revocation of probation and execution of a sentence, the district court must determine whether there is clear and convincing evidence that a condition of probation has been violated. It is well established that polygraph test results are not admissible in criminal or civil trials, because they are not scientifically reliable. However, Minn. Stat. §609.3456 allows a district court to order an offender to submit to polygraph examinations as a condition of probation when the offender has received a stay of imposition or execution of sentence.
Finding persuasive a case from the Virginia Supreme Court considering this issue, Turner v. Virginia, 685 S.E.2d 665 (Vir. 2009), and other jurisdictions which follow the same rule, the court of appeals holds that it is improper to admit polygraph test results as substantive evidence of a violation in probation revocation proceedings, because such evidence is unreliable and, therefore, cannot be clear and convincing evidence of a probation violation. The court is careful, however, to make clear that it is not imposing any restrictions on the use of polygraphs as a tool in law enforcement or in the treatment, therapy, monitoring, or evaluation of offenders, and evidence that an offender violated a condition requiring them to submit to polygraph testing is still admissible in a probation violation proceeding, while the results of any polygraph test are not.
Here, the references to appellant’s polygraph testing alluded to the fact that he failed the tests, and, therefore, the test results were admitted as substantive evidence of his failure to complete treatment (a violation of his probation). The district court abused its discretion by allowing references to appellant’s failed polygraph tests at his probation revocation hearing. However, a new hearing is not required, because the district court’s finding that appellant violated his probation was not premised on his failed polygraphs, but, instead, on his failure to complete sex offender treatment, which was for myriad reasons, not just the failed polygraphs. State v. Chad Michael Nowacki, Ct. App. 5/23/2016.
• Search and seizure, dog sniff: No expectation of privacy in common areas of secured, multi-unit condo buildng; area immediately outside of condo unit is not curtilage. Police received a tip that appellant and his girlfriend were trafficking in large quantities of marijuana, and determined the two were living in a multi-unit condominium building and that the two had been arrested together in 2011 for fifth-degree possession. Appellant’s girlfriend rented the condo unit from appellant’s mother, the owner of the unit. Police could access the interior of the building using a key stored inside of a locked keybox, to which all officers in the department had a key, previously provided by the property management company. An officer and trained detection dog entered the building using the key from inside the locked keybox, and went to appellant and his girlfriend’s unit on the third floor. The dog was directed to sniff immediately outside of the door, and alerted in a way that indicated controlled substances were inside the unit. A warrant was obtained later that day based on information from the confidential informant, appellant and his girlfriend’s arrest records, and the dog sniff. During a search of the unit conducted pursuant to the warrant, police located large quantities of marijuana, oxycodone tablets, firearms, and bullet-resistant vests. Appellant was charged with various drug and firearm offenses. He moved to suppress the evidence found during the search of his condo unit, arguing that the warrantless entry into the building was unlawful and that the dog sniff was not justified by probable cause. The district court denied appellant’s motion, and appellant was found guilty after a stipulated facts trial.
Held, appellant does not have a right to challenge the warrantless entry into the condo building, because he did not have a legitimate expectation of privacy in the common areas of the building. To have a legitimate expectation of privacy, a defendant must have exhibited an actual subjective expectation of privacy in a particular place, and that expectation of privacy must be reasonable. The court of appeals focuses on the second prong of this analysis, finding that any subjective expectation of privacy appellant may have held in the common areas of the condo building were not reasonable. This issue has not been addressed by the United States or Minnesota Supreme Courts, but State v. Milton, 821 N.W.2d 780 (Minn. 2012) (holding that “a resident of a multifamily residence has a ‘diminished’ expectation of privacy in the common areas” of a multifamily residential duplex building) and the vast majority of federal circuit court opinions support the conclusion that a resident of a secured, multi-unit residential building does not have a legitimate expectation of privacy in the common areas of the building and, thus, may not challenge an officer’s warrantless entry into the building.
Next, assuming appellant did have a legitimate expectation of privacy, the court finds that the warrantless entry was nonetheless justified based on the property management company’s consent. A property manager may consent to a search of common areas of a multi-unit residential building that are under the property manager’s control. Additionally, whether the property management company had actual authority to consent to the warrantless entry, the company had apparent authority to do so, which also justifies the warrantless entry.
Under Florida v. Jardines, 133 S.Ct. 1409 (2013), a dog sniff conducted within the curtilage of a home is a search for purposes of the 4th Amendment. Here, however, the court holds that the area immediately outside of the door of appellant’s multi-unit residential condominium building is not the curtilage of the unit, because appellant’s use of the area was limited by the rules and regulations of the building, he did not have exclusive use of the area, the area was not enclosed in any way, and the area was fully visible to all persons who might walk by appellant’s door. Because the area outside of appellant’s condo unit door was not within the curtilage of his home, appellant cannot establish that the dog sniff conducted in that area was a search for purposes of the 4th Amendment.
Under the Minnesota Constitution, whether a dog sniff is to be analyzed under a probable cause or reasonable suspicion standard depends on the facts of each particular case, balancing the nature and significance of the intrusion on the individual’s privacy interests against the gravity of the public concerns that a dog sniff serves and the degree to which the conduct at issue advances the public interest. Appellant did not have a strong privacy interest in the common hallway outside of his unit. The public concerns served by the dog sniff, investigating and prosecuting drug offenses, are significant. A dog sniff is also a valid investigative tool to combat drug crime. As in State v. Davis, 732 N.W.2d 173 (Minn. 2007), a balancing of these factors weighs in favor of applying a reasonable, articulable suspicion standard to the dog sniff conducted in this case. The court concludes by affirming the district court’s finding that the dog sniff was supported by a reasonable, articulable suspicion of criminal activity. State v. Stuart Donald Luhm, Ct. App. 5/31/2016.
• Burglary: Minn. Stat. §609.582 does not allow district court to enter convictions or impose sentences on mutiple counts of burglary arising from single course of conduct. After a jury trial, appellant was found guilty of first-degree burglary (assault) and first-degree burglary (dangerous weapon). At his sentencing, the district court entered convictions on both counts and sentenced him to 52 months on each count, to be served concurrently. On appeal, appellant argues that his convictions are improper, because first-degree burglary (dangerous weapon) is an included offense of first-degree burglary (assault), and that the district court erred in imposing sentences for each conviction, because they arose from a single course of conduct.
Minn. Stat. §609.04 permits the conviction of either the crime charged or an included offense, but not both. An included offense is a crime necessarily proved if the crime charged were proved. First-degree burglary (dangerous weapon) and first-degree burglary (assault) each require proof of an element that the other does not, so first-degree burglary (dangerous weapon) is not a lesser-included offense of first-degree burglary (assault). However, Minn. Stat. §609.04 also bars multiple convictions under different sections of a statute for acts committed during a single behavioral incident, and, if a person’s conduct constitutes more than one offense under the law, the person may be punished for only one of the offenses, unless a statutory exception applies.
The state argued only that an exception applies, not that appellant’s convictions arose from a single course of conduct. Minn. Stat §609.585 provides that “a prosecution for or conviction of the crime of burglary is not a bar to conviction of or punishment for any other crime committed on entering or while in the building entered.” The court of appeals holds that “any other crime” in Minn. Stat. §609.585 does not include another burglary crime, based on the plain language of the statute, which is supported by a similar interpretation suggested by prior case law. Thus, Minn. Stat. §609.585 does not authorize the entry of convictions or imposition of sentences for multiple counts of burglary that arose from a single course of conduct. State v. Ian Christopher Mitchell, Ct. App. 5/31/2016.
EMPLOYMENT & LABOR LAW
• Discrimination; employee’s termination upheld. An employee’s discharge for improper physical contact with a co-worker was upheld by the 8th Circuit Court of Appeals. The terminated employee’s claims of race, gender, and age discrimination all failed because the employer had a legitimate, non-discriminatory reason for the discharge. Blackwell v. Alliant Techsystems, Inc., 2016 U.S. App. LEXIS 8912 (Minn. App. 2016) (unpublished).
• Race discrimination; no reinstatement or damages. Despite a jury finding that an employee was fired because of his race, the 8th Circuit upheld denial of relief. The trial court’s refusal to order reinstatement was proper because of mistrust by management of the employee, and front pay also was inappropriate because of lack of sufficient supporting evidence. Olivares v. Brentwood Industries, –2016 U.S. App. LEXIS 8789 (Minn. App. 2016) (unpublished).
• FMLA; overtime allowed; fees reduced. An employer was liable for violating the Family Medical & Leave Act (FMLA) by miscalculating overtime pay while the employee was on leave, but reduction of the employee’s attorney’s fees was proper. The 8th Circuit correctly granted summary judgment to the employee on an interference claim under the FMLA and limited fees due to lack of success on some claims. Hernandez v. Bridgestone Ams Tire Operations, –2016 U.S. App. LEXIS 8788 (Minn. App. 2016) (unpublished).
• Labor law; arbitration award vacated. A rare overturning of an arbitration award in a labor union dispute with management concerning work shirts for nurses was upheld by the 8th Circuit. It affirmed a ruling by U.S. District Court Judge David Doty in vacating an award calling for nurses in a collective bargaining agreement to split future weekend shifts on grounds that the arbitrator lacked authority to make a prospective award. Minn. Nurses Ass’n. v. North Mem. Health Care, –2016 U.S. App. LEXIS 8793 (Minn. App. 2016) (unpublished).
• Defamation; privilege for evaluating performance. A medical doctor’s lawsuit for defamation and other claims against the Mayo Clinic arising out of his forced resignation upon completion of an unfavorable evaluation period was dismissed. Affirming a ruling by Judge Doty, the 8th Circuit Court of Appeals held that negative statements made about the doctor’s work were protected by a qualified privilege because they were made in evaluating his performance, and this privilege was not overcome by malice or ill will. Elkharwily v. Mayo Holding Company, –2016 U.S. App. LEXIS 9234 (Minn. App. 2016) (unpublished).
• Arbitration; waiver by litigation. An employer who litigated an employee’s wrongful termination and breach of contract for eight months before seeking to compel arbitration waived the arbitration clause in the employment contract. Upholding a ruling of U.S. District Court Judge Paul Magnuson in Minnesota, the 8th Circuit held that arbitration would now be prejudicial to the employee. Messina v. North Cent. Distrib., 2016 U.S. App. LEXIS 8562 (Minn. App. 2016) (unpublished).
• Labor law; unlicensed instructors not in union. Instructors in a school district’s pre-kindergarten (pre-K) program are not within the collective bargaining unit negotiating for teachers. Upholding a decision by the Bureau of Mediation Services, the Minnesota Court of Appeals held that because licensure is not required by federal or state laws or district policy, pre-K personnel cannot be in the union representing teachers. Ind. Sch. Dist. No. 622 v. North St. Paul – Maplewood – Oakdale Educ. Ass’n., –2016 U.S. App. LEXIS 37 (Minn. App. 2016) (unpublished).
• Workplace defamation; principal’s appeal reversed. An ousted principal in the Minneapolis Public School system was entitled to pursue a defamation claim arising out of a letter distributed by the district to parents of students regarding his discharge. The appellate court reversed a dismissal of the lawsuit on grounds that there was evidence that the school district knowingly circulated false information about the termination, warranting remand for trial, while upholding dismissal by the trial court of a claimed violation of the Data Practices Act for disclosing personal data. Exner v. Minneapolis Public Schools, 2016 Minn. App. LEXIS 468 (Minn. App. 2016) (unpublished).
• Unemployment compensation; eligibility dispute inability to work. An employee unable to perform a job assignment due to a temporary family crisis was entitled to unemployment compensation benefits. The court of appeals reversed a decision by an Unemployment Law Judge (ULJ) with the Department of Employment & Economic Development (DEED) that an employee was not eligible for benefits because she “quit” work under Minn. Stat. §268.098, subd. 2(a). Posey v. Securitas Sec. Services, USA, Inc., 2016 Minn. App. LEXIS 33 (Minn. App. 2016) (unpublished).
• Unemployment compensation; “single incident” doctrine. Another denial of benefits by DEED was reversed on behalf of a technician at a veterinary clinic who was fired for suggesting that a client’s dog need not undergo a particular type of vaccination. The appellate court held that under the “single incident” doctrine, the conduct was not so heinous to constitute disqualifying “misconduct” because the vaccination was not legally required. Nash v. Douglas Animal Hosp., Inc., 2016 Minn. App. LEXIS 507 (Minn. App. 2016) (unpublished).
• Unemployment compensation; two denials affirmed. But two disqualification decisions by ALJs were upheld.
An office employee who constantly came to work late, left early, and often worked from home, despite requirements to be in the office, was denied benefits. Her explanation that she wanted to avoid traffic was unavailing to negate a determination of “misconduct.” Shaw v. First Advantage Background Servs., 2016 Minn. App. LEXIS 523 (Minn. App. 2016) (unpublished). A racist comment made by a superior was insufficient to allow benefits to an employee who quit. Because the employer took action to prevent any more racist comments and none was made, the employee lacked “good reason” caused by the employer to quit. Yusuf v. Masterson Pers., Inc., 2016 Minn. App. LEXIS 35 (Minn. App. 2016) (unpublished).
• FLSA expansion. The Obama administration has expanded eligibility for overtime under the Fair Labor Standards Act (FLSA). New rules promulgated by the Department of Labor are expected to affect about 4.2 million salaried workers who have been ineligible for extra compensation, at the rate of 1-1/2 times their normal pay for working in excess of 40 hours per week. The exemption from overtime has applied to employees with some managerial responsibilities earning more than $23,660 annual or $440 per week. The new regulations lift the ceiling to $46,476 or $913 weekly, which should cover about 35 percent of the work force. Employee advocates and labor unions applauded the expansion, while business and management groups opposed it and said it may curtail employment hiring or result in reduction of work schedules or salaries for current employees.
Hellmuth & Johnson, PLLC
• U.S. Supreme Court Upholds 8th Circuit decision on reviewability of Army Corps of Engineers action under Clean Water Act. In a unanimous decision, the U.S. Supreme Court ruled that an approved jurisdictional determination (JD) by the United States Army Corps of Engineers (Corps) is a final agency action subject to judicial review under the Administrative Procedures Act. An approved JD (as opposed to a “preliminary” JD) is a decision by the Corps on whether or not a landowner’s property contains “waters of the United States” into which discharges would be regulated by the Clean Water Act.
The significance of this ruling is that a landowner may appeal a JD before having to go through the long and expensive process of applying for a discharge permit under the Clean Water Act. There is speculation, however, that this ruling may make the Corps less willing to issue JDs, as the Corps has clearly indicated a preference for the permit application process in this case. This decision to uphold the 8th Circuit ruling resolves its split with the 5th Circuit, which had ruled in 2014 that a JD was not a final agency action subject to judicial review. Belle Co., L.L.C. v. U.S. Army Corps of Eng’rs, 761 F.3d 383 (5th Cir. 2014). U.S. Army Corps of Eng’rs v. Hawkes Co., Inc. et al., No. 15-290, 2016 WL 3041052 (U.S. 5/31/2016).
• Congress reforms primary U.S. chemical safety law. For the first time in 40 years, Congress has approved a significant overhaul of the Toxic Substances Control Act (TSCA), with a vote by the House on 5/24/2016 and the Senate on 6/7/2016 to approve the Frank R. Lautenberg Chemical Safety for the 21st Century Act. TSCA reform has been long in coming, after the law suffered much criticism for being ineffectual and for having been surpassed by more updated legislation like the European Union’s Registration, Evaluation, Authorization, and Restriction of Chemicals (REACH) program.
TSCA was designed to protect human health and the environment by requiring testing and necessary-use restrictions of certain chemical substances in commercial goods. However, nearly 65,000 chemicals already on the market were not subject to EPA review under TSCA. Chemicals not grandfathered in were only subject to regulation that was considered “least burdensome” to industry. EPA’s criteria have now been amended by the new law, and the new standard requires assurance of no “unreasonable risk of injury to health or the environment.” Significantly, EPA must regulate chemicals without regard to cost or benefits if an unreasonable risk is found.
The new legislation requires a new screening requirement for existing chemicals. EPA will be required to determine which chemicals require further evaluation and must initiate risk evaluations of at least 20 high priority chemicals within three and a half years. If the risk evaluation results in a finding of unreasonable risk, EPA must propose regulations to reduce such risk within two years. New chemicals will be subject to a new review procedure that requires EPA to make a determination of risk prior to any commercial production. Chemical manufacturers will face increased fees to cover up to 25 percent of the new chemical notification program cost for EPA.
For both existing and new chemicals, EPA will have new authority to issue orders requiring testing to be performed by manufacturers. Under TSCA previously, EPA would have had to go through a lengthy rulemaking process to require such testing.
The TSCA reform contains state preemption provisions that raised objections by many states, which had regulated to make up for what TSCA previously lacked. Minnesota Pollution Control Agency Commissioner John Linc Stine joined state environmental officials from Connecticut, New York, New Hampshire, Vermont and Washington in calling on Congress to reconsider the broad preemption language of the Act. The reform does grandfather in any state statutory or regulatory action taken prior to 4/22/2016, but even so there are exceptions when those laws conflict. For example, any existing or future state law that conflicts with a final EPA decision with respect to the safety or regulation of a particular chemical is preempted. But states may seek waivers for federal preemption.
President Obama has already indicated his approval of the Lautenberg Act and is expected to sign it into law soon.
• EPA proposes update to NPDES regulations that would tighten oversight of states CWA permitting. In a proposed rule with a comment period ending on 7/18/2016, EPA is suggesting several “key fixes” to the Clean Water Act’s (CWA) National Pollutant Discharge Elimination System. One of these fixes would allow EPA to force a state to stop extending an expired NPDES permit. States often extend an expired NPDES permit for many years beyond the five-year term for such permits provided by the CWA. Under the proposed rule, EPA would be able to object to the continuance of an expired NPDES permit. The state would then have 90 days to file a revised permit or EPA would be able to issue a new permit instead. EPA is seeking comment on whether it would be appropriate to exercise this power after either a two-year or a five-year period following the initial five-year permit term.
The NPDES proposal also includes a number of changes to permit applications and implementing rules. EPA says these changes will have only minor practical effects. One such change would require new dischargers to submit data for confirmation of permit application estimates no later than 18 months after they begin operation—six months shorter than currently required. In addition, POTWs are no longer exempt from such requirements. The proposed rule also addresses transparency requirements by allowing states to give notice of permit actions online rather than in a newspaper. The rule also proposes expanding notice requirements beyond major permit actions to all NPDES permits.
Parkway Law LLC
• Article III standing; “concreteness.” The United States Supreme Court reversed and remanded a standing decision by the 9th Circuit in an FCRA action, finding that the 9th Circuit had failed to consider the “concreteness” prong of the injury-in-fact analysis required for a plaintiff to establish standing. Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016).
• Recall of jurors following verdict. The Supreme Court held that a district court has “limited” inherent power to rescind a jury discharge order and recall a jury for further deliberations after identifying an error in the jury’s verdict, but that “any suggestion” of prejudice should result in the trial court not doing so. Dietz v. Bouldin, ___ S. Ct. ___ (2016).
• Favorable ruling on the merits not required for defendant to recover attorney’s fees under Title VII. Reversing the 8th Circuit, the Supreme Court held that a favorable ruling on the merits is not a necessary predicate to a finding that a Title VII defendant is a prevailing party eligible for an award of attorney’s fees. CRST Van Expedited, Inc. v. EEOC, 136 S. Ct. 1642 (2016).
• Class certification reversed; absence of predominance. Exercising jurisdiction under 28 U.S.C. §1292(e) and Fed. R. Civ. P. 23(f), the 8th Circuit reversed an order by Judge Frank that had certified a class in an environmental action, finding that Judge Frank had abused his discretion by limiting consideration of individualized issues among class members, and that he had “essentially manufactured” a class that would meet the predominance requirements of Fed. R. Civ. P. 23(b)(3). The 8th Circuit also rejected certification of a Fed. R. Civ. P. 23(b)(2) class, finding an absence of required “cohesiveness.” Ebert v. General Mills, Inc., ___ F.3d ___ (8th Cir. 5/20/2016).
• Waiver of right to arbitration; delay and prejudice. Affirming an order by Judge Magnuson, the 8th Circuit held that the defendant had waived its right to compel arbitration when it waited more than eight months after the action was commenced, and more than one month after its motion to transfer venue was denied, before moving to compel arbitration, and also found that the plaintiff had been prejudiced by that delay. Messina v. North Central Distrib., Inc., ___ F.3d ___ (8th Cir. 2016).
• No abuse of discretion in striking of 51-page declaration; word limits under Local Rules. Affirming orders by Judge Doty, the 8th Circuit found no abuse of discretion in his striking of the plaintiff’s 51-page declaration submitted in opposition to the defendants’ motion for summary judgment that effectively “doubled” the permitted word limit under the Local Rules. Elkharwily v. Mayo Holding Co., ___ F.3d ___ (8th Cir. 2016).
• Exclusion of untimely expert reports; no abuse of discretion. The 8th Circuit found no abuse of discretion in Judge Magnuson’s exclusion of portions of the plaintiff’s supplemental expert reports served more than 10 months after the deadline established in the amended scheduling order, while also finding that the plaintiff had not suffered any prejudice from those exclusions. Amplatz v. Country Mut. Ins. Co., ___ F.3d ___ (8th Cir. 2016).
• Significant monetary sanctions reversed. In November 2015, the column noted Judge Davis’s order imposing more than $281,000 in sanctions against plaintiffs’ counsel in a long-running dispute over rights to what is claimed to be Native American land. The 8th Circuit recently reversed those sanctions, describing Indian law as “complex,” and finding that the plaintiffs and their counsel had advanced “good-faith, nonfrivolous arguments distinguishing, calling for modifications, or seeking extensions of existing law.” Wolfchild v. Redwood County, ___ F.3d ___ (8th Cir. 2016).
• Fed. R. Civ. P. 15(c)(1)(C); relation back; John Doe defendants. Acknowledging the absence of a controlling authority from the 8th Circuit, Judge Montgomery joined the “vast majority of Circuit Courts” and held that “a plaintiff’s lack of knowledge of the proper party to be sued” was not a “mistake concerning the party’s identity” for purposes of Fed. R. Civ. P. 15(c), meaning that a proposed amendment intended to identify John Doe defendants did not relate back for purposes of the statute of limitations. Heglund v. Aitkin County, 2016 WL 3093381 (D. Minn. 6/1/2016).
• Unaccepted tender does not moot class claims. Defendants in the District of Minnesota continue to fail in their attempts to avail themselves of the perceived “back door” identified by the Supreme Court in Campbell-Ewald Co. v. Gomez. In a recent and thorough decision, Judge Kyle rejected the defendant’s attempt to moot a putative TCPA class action by tendering a certified check to the plaintiff accompanied by an offer to stipulate to an award of costs and entry of an injunction. Ung v. Universal Acceptance Corp., 2016 WL 3136858 (D. Minn. 6/3/2016).
• Motion to vacate default judgment denied. Judge Frank denied the defendant’s motion to vacate a default judgment on the grounds of excusable neglect, finding that while the defendant’s motion was only “moderate[ly]” delayed when it was brought eight months after service of the summons and complaint, and four months after entry of the default judgment, the defendant offered “no reason” for its neglect, its conduct suggested that it acted in “bad faith,” and its liability defense was “weak.” Core Distrib., Inc. v. Xtreme Power (USA) Inc., 2016 WL 2733407 (D. Minn. 5/10/2016).
• Prevailing trademark defendant’s request for attorney’s fees denied. Judge Nelson denied a prevailing trademark defendant’s request for attorney’s fees after two years of hard-fought litigation, finding that the plaintiff’s claims were not “groundless or without merit,” and that the case was not otherwise “exceptional.” Mountain Mktg. Group, LLC v. Heimerl & Lammers, LLC, 2016 WL 2901735 (D. Minn. 5/18/2016).
• Significant proposed Local Rule amendment relating to the filing of documents under seal in civil cases. The District of Minnesota has published proposed new Local Rule 5.6, which is intended to provide a uniform process for filing motion-related documents under seal in civil cases, to reduce the volume of information filed under seal, and to ensure that no information is sealed without the Court’s permission. The proposed rule provides a four-step process to determine whether information is to be sealed. The Court is receiving comments on proposed Local Rule 5.6 through 7/29/2016, and comments may be mailed to the Court, or submitted by email to MnFedRules@mnd.uscourts.gov.
Law Office of Josh Jacobson
• Conviction under state law may constitute “aggravated felony” without a connection to interstate commerce. Under the Immigration and Nationality Act (INA), any foreign national convicted of an “aggravated felony” after entering the United States is deportable and ineligible for several forms of discretionary relief. An “aggravated felony” is defined in a series of offenses listed in INA §1101(a)(43), whether in violation of federal, state, or foreign law. The United States Supreme Court recently held that a state offense may constitute an “aggravated felony” if it contains every element of a federal crime save one requiring a connection to interstate or foreign commerce. “For obvious reasons, state criminal laws do not include the jurisdictional elements common in federal statutes. State legislatures, exercising their plenary police powers, are not limited to Congress’s enumerated powers; and so States have no reason to tie their substantive offenses to those grants of authority. See, e.g., United States v. Lopez, 514 U. S. 549, 567 (1995). In particular, state crimes do not contain interstate commerce elements because a State does not need such a jurisdictional hook.” Torres v. Lynch, 578 U.S. ___, ___ (2016). http://www.supremecourt.gov/opinions/15pdf/14-1096_5hdk.pdf
• No nexus between group membership and persecution suffered. The 8th Circuit Court of Appeals denied the petition for review, holding that, even if one accepts the petitioner’s proposed groups as cognizable, particular social groups (PSGs) [(1) male, gang-aged family members of murdered gang members, (2) male, gang-aged family members of his cousin, Oscar, and (3) male, gang-aged members of the Institute], he nonetheless failed to show a nexus between his membership in those groups and the persecution he suffered. The court further found that the BIA did not commit error when rejecting the petitioner’s Convention Against Torture (CAT) claim, given his failure to show the government of El Salvador participates in or acquiesces to torture. Aguinada-Lopez v. Lynch, No. 15-1095, slip op. (8th Cir. 6/7/2016). http://media.ca8.uscourts.gov/opndir/16/06/151095P.pdf
• Assault in the first degree is a crime involving moral turpitude. The 8th Circuit Court of Appeals denied the petition for review, holding the petitioner’s 2004 Arkansas conviction for assault in the first degree was categorically a crime involving moral turpitude (CIMT). The court also found the IJ was not collaterally estopped from reviewing the issue of whether the petitioner’s conviction for assault was a CIMT since the prior determination that it was not a CIMT had not yet become a valid and final judgment. “As the BIA noted, nothing in its order reopening and remanding the action precluded the IJ from reconsidering the CIMT issue on remand. See In re Patel, 16 I&N Dec. 600, 601 (BIA 1978) (holding that a remand, unless qualified or limited for a specific purpose, is effective for the stated purpose and for consideration of any and all matters that the IJ deems appropriate).” Estrada-Rodriguez v. Lynch, No. 15-2223, slip op. (8th Cir. 6/6/2016). http://media.ca8.uscourts.gov/opndir/16/06/152223P.pdf
• Failure to prove in absentia removal order was not mailed and delivered. The 8th Circuit Court of Appeals upheld the denial of the petitioner’s motion to reopen his in absentia removal order, finding he had failed to rebut the presumption that the Department of Homeland Security’s Notice of Hearing was mailed and delivered to him. The court also found the Board of Immigration Appeals did not err when it denied the petitioner’s motion to reopen to apply for asylum in view of the motion being time-barred. Diaz v. Lynch, No. 15-3195, slip op. (8th Cir. 6/1/2016). http://media.ca8.uscourts.gov/opndir/16/06/153195P.pdf
• Citizenship revocation on account of misrepresentation of true name and identity. The 8th Circuit Court of Appeals held the U.S. District Court (District of Nebraska) did not commit error when it cancelled the petitioner’s naturalization and revoked his citizenship following the government’s proof that he procured his naturalization by misrepresenting or concealing information about his true name and identity. It further found that the petitioner could not use the proceeding to collaterally attack a 1995 deportation order since he had failed to exhaust his administrative remedies related to that order. United States v. Hirani, No. 15-1583, slip op. (8th Cir. 5/31/2016). http://media.ca8.uscourts.gov/opndir/16/05/151583P.pdf
• Probate courts may make special immigrant juvenile findings in guardianship proceedings. The Minnesota Court of Appeals held that a probate court is authorized to make special immigrant juvenile (SIJ) findings in a guardianship proceeding pursuant to Minn. Stat. §524.5-310(a). Furthermore, a probate court abuses its discretion by declining to consider a request for special immigrant juvenile findings in a guardianship proceeding when the record supports the appointment of a guardian and contains evidence as to each potential special immigrant juvenile finding. In re Guardianship of Chimborazo Guaman, Ct. App. 5/16/2016. http://mn.gov/law-library-stat/archive/ctappub/2016/opa151412-051616.pdf
• Substantial failure to provide requested evidence. The Board of Alien Labor Certification Appeals ruled that an employer’s failure to provide sufficient evidence, in response to an audit request for proof that U.S. applicants had been contacted by phone, email, and/or mail, constitutes “substantial failure” and hence justifies denial of its application for a labor certification. “In the event that an employer is selected for an audit following its submission of an application for permanent labor certification, the employer must furnish the documentation requested by the CO [Certifying Officer] in support of its application. 20 C.F.R. §§656.10(f), 656.17(a)(3), 656.20(a). The regulations provide that an application will be denied if there is a substantial failure by the employer to provide required documentation after an Audit Notification issued. 20 C.F.R. §656.20(b).” Matter of Scenic Landscaping LLC, 2012-PER-00989 (6/1/2016). http://www.oalj.dol.gov/decisions/alj/per/2012/in_re_scenic_landscaping_l_2012per00989_(jun_01_2016)_074919_cadec_sd.pdf
Frey Law Office
• Reservation boundaries; congressional intent controls diminishment. The Omaha Tribe governs a 300,000-acre reservation that was created by treaty in 1854 and now overlaps the village of Pender, Nebraska. In 2006, the tribe amended its Beverage Control Ordinance to tax liquor sales throughout the reservation, including in mostly non-Indian Pender. The Pender retailers (eventually joined by the intervenor state of Nebraska) sued, arguing that an 1882 act diminished the reservation such that Pender actually lies outside the reservation boundary.
Applying the three-part Solem v. Bartlett diminishment test, both the district court and 8th Circuit ruled against the state. Nebraska appealed and the Supreme Court granted certiorari on the question of “Whether ambiguous evidence concerning the first two Solem factors forecloses any possibility that diminishment could be found on a de facto basis.” Writing for a unanimous court, Justice Thomas reaffirmed the Court’s reliance on the three-part Solem test, emphasizing that “only Congress can divest a reservation of its land and diminish its boundaries, and its intent to do so must be clear.” Under Solem’s first step, “the most probative evidence of diminishment is, of course, the statutory language.” Nevertheless, because many turn-of-the-century surplus-lands-acts did not clearly distinguish between diminishment (which decreases a tribe’s territorial jurisdiction) and mere opening (which only allows private ownership within a tribe’s territory), Solem’s second step looks to any “unequivocal evidence” of the historical understanding of U.S. officials, tribal leaders, and tribal members concerning the legislation. Over time, the Court has also added a third step, evaluating the United States’ subsequent treatment of the area and its modern-day demographics, but has emphasized that this step offers “the least compelling” evidence of diminishment.
Applying this test, the Court agreed that the original reservation boundaries survived the 1854 act, which lacked any “clear textual signal that Congress intended to diminish the reservation.” The Court reasoned that at Solem’s second step, “[t]he mixed historical evidence relied upon by the parties cannot overcome” this first, most probative factor. Moreover, although the third-step subsequent-demographic history that Nebraska staked its case on can be “one additional clue as to what Congress expected would happen once land on a particular reservation was opened to non-Indian settlers,” the Court admonished that it “has never relied solely on this third consideration to find diminishment[,]” and refused to rely on such evidence to “rewrite” the 1882 Act. Nebrasksa v. Parker, ___ U.S. ___, 136 S. Ct. 1072 (2016).
• Land title; “loyal Mdewakanton” descendants failed to state a claim. During the U.S.-Dakota War of 1862, a group of “loyal Mdewakanton” supported the U.S. and settlers. In return, the Secretary of the Interior recommended setting apart 12 square miles of land in southern Minnesota for those Mdewakanton and their heirs under an 1863 act. From these facts, modern descendants of the loyal Mdewakanton have commenced a series of suits, most recently an attempted class action against the Lower Sioux Indian Community and 75 private landowners who now own and occupy the tract. The plaintiffs asserted claims for trespass and ejectment, claiming a superior right to title and possession.
The 8th Circuit affirmed Judge Davis’s dismissal of the suit for failure to state a claim. It noted that “federal common law claims arise when a tribe ‘assert[s] a present right to possession based … on their aboriginal right of occupancy[,]’” but not when an individual does. Further, the 1863 act’s text and structure did not offer a “private remedy” to the plaintiffs. In light of the Court’s decision that the complaint did not state a claim for relief, it did not address the district court’s alternate grounds for dismissal, including that the Lower Sioux tribe is immune from suit and that equitable doctrines peculiar to Indian law blocked the suit.
Despite affirming the dismissal, the Eighth Circuit reversed the district court’s award of more than $280,000 in sanctions against the plaintiffs and their attorneys. It observed that “[f]ederal Indian law is complex” and that the issues in the case were “far from clear cut.” Wolfchild v. Redwood County, ___ F.3d ___, 2016 WL 3082341 (8th Cir. 2016).
Hogen Adams PLLC
Hogen Adams PLLC
• Trademark law: Exceptional case for attorneys’ fees. Judge Nelson recently denied a motion for attorney’s fees in a trademark case. Mountain Marketing Group sued Heimerl & Lammers for trademark infringement concerning the registered mark 1-800-INJURED. Mountain Marketing alleged that Heimerl willfully infringed by using and advertising the telephone number 1-612-INJURED. Defendant Heimerl prevailed. As the prevailing party, Heimerl argued that Mountain Marketing pursued “a groundless case in an unreasonable manner” making the case “exceptional.” In trademark cases, the prevailing party may receive its attorney’s fees if the court finds that the case was exceptional. The Supreme Court had just announced a new standard for determining whether a case was “exceptional” under the patent laws. Under this new standard for patent infringement cases, “[A]n ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position… or the unreasonable manner in which the case was litigated.” The 8th Circuit has yet to address the applicability of this standard to trademark infringement claims. The district court did not need to resolve whether the standard set forth by the Supreme Court applied in this case, however, because its current standards were substantively similar. The court noted that Mountain Marketing’s inflated settlement demands and failure to abide by the court’s timing and scheduling instructions were not enough evidence to make the case “exceptional.” This could simply mean, the court found, that Mountain Marketing misjudged the strength of its infringement claims. Therefore, the court denied Heimerl’s motion for attorney fees. Mt. Mktg. Grp., LLC v. Heimerl & Lammers, LLC, No. 14-cv-846 (SRN/BRT) (D. Minn. 5/18/2016).
– Tony Zeuli & Saalini Sekar
Merchant & Gould
• Mortgages; contracts. Wholly owned subsidiaries of state or federally chartered banks that originate residential mortgage loans are exempt from the Minnesota Residential Mortgage Originator and Servicer Licensing Act (MOSLA). Home Affordable Modification Program (HAMP) trial plans are not enforceable contracts. Borrowers obtained a residential mortgage loan from Wells Fargo Mortgage, Inc., which was wholly owned by and later merged into Wells Fargo Bank, N.A. Wells Fargo offered to enter the borrowers into a trial plan of HAMP. Wells Fargo did not receive all the documents it requested, though the borrowers claim they provided them. Wells Fargo foreclosed upon the home, and the borrowers sued. HAMP does not provide a private cause of action, so the borrowers proceeded under MOSLA. However, MOSLA does not apply to loans “originated by” federally chartered banks. The Minnesota Federal District Court determined that Wells Fargo Mortgage, while not a federally chartered bank, is exempt from MOSLA because it was wholly owned by a federally chartered bank. The district court also determined that the HAMP trial plan is not an enforceable contract. The trial plan stated that it was just a stepping stone to a modification, and not an actual modification. The credit agreement statute of frauds at Minn. Stat. §513.33 also prevented contract formation because it was not signed by the borrowers, and did not include terms such as the interest rate, monthly payment amount, or the remaining loan balance. Finally, the district court dismissed a promissory estoppel claim. There is no detrimental reliance by making payments on a mortgage loan when a borrower is already obligated to make payments. Kelly v. Wells Fargo Bank, N.A., No. 14-CV-03133, 2016 WL 1642624 (D. Minn. 4/25/2016).
• RESPA; MOSLA. The Real Estate Settlement Procedures Act (RESPA) shifts the investigatory burden from borrowers to mortgage servicers upon receipt of even vague or generic information requests. Servicers may have to obtain and investigate complete servicing records, and may not place the investigatory burden upon the borrower. Violations of RESPA are violations of MOSLA. Borrower obtained a residential mortgage loan in 2001 and appeared to have made all payments in the full required amount at the required times. The loan does not appear to have been originated by a state or federal bank. Chase initially serviced the loan, and then turned over servicing to Specialized Loan Servicing (SLS) in June 2013. Previously, in August 2010, Chase had incorrectly applied a mortgage payment entirely to principal, and failed to apply a portion to interest. The earliest servicing records that SLS obtained went back only so far as June 2011. SLS repeatedly informed the borrower that his account was delinquent and charged late fees. SLS and the borrower exchanged numerous letters, including qualified written requests under RESPA. Despite numerous requests, SLS did not investigate the period before June 2011. In each response letter, SLS referenced its previous correspondence and stated that it considered the matter resolved. RESPA requires that, upon a sufficiently detailed request, mortgage servicers must investigate the borrower’s claims and make appropriate corrections. The Minnesota Federal District Court determined that SLS had “plainly” violated RESPA because SLS never attempted to obtain pre-2011 documents. The district court also determined that borrowers’ requests do not need to specify where an error occurred; they only need to generally describe the “reasons for the belief” that there is an error. The reasons described here were that the borrower made all required payments at the correct time. By virtue of a finding that SLS violated RESPA, the district court held that SLS violated MOSLA. Wirtz v. JPMorgan Chase Bank, N.A., No. 15-CV-02286, 2016 WL 2642999 (D. Minn. 5/9/2016).
• Foreclosure. Minnesota Statutes section 582.043 states that mortgage servicers must “halt” a foreclosure pending review of a loan-modification application. The Minnesota Federal District Court held that “halt” means that all foreclosure proceedings must be suspended or stopped during the application review. The borrower brought claims based upon a violation of the dual-tracking statute, negligence, and others. On a motion to dismiss, the court held that the borrower sufficiently alleged that the mortgage servicer violated the statute by continuing to publish notice of foreclosure sale during the application review. But the court also held that there is no negligence claim arising out of a violation of the statutory duty. Hall v. The Bank of New York Mellon, No. 16-CV-167, 2016 WL 2930917 (D. Minn. 5/19/2016).
Meagher & Geer, PLLP
• Property tax: Appeal dismissed for failure to serve county attorney. Rejecting the taxpayer’s constructive receipt argument, the Minnesota Tax Court dismissed a Dakota County property owner’s property tax appeal because the taxpayer had failed serve the Dakota County Attorney’s office. The taxpayer’s petition asserted that he served the county assessor, treasurer, and auditor, but not the Dakota County Attorney. The county attorney similarly did not have a record of having been served by the taxpayer, though the county had constructive notice from the other county offices. Although the court noted that it “under[stood] Mr. Rorem’s predicament, petitioners must follow [Minn. Stat.] §278.01, subd. 1(a)’s service requirement for this court to have jurisdiction over their tax petitions.” The petition was dismissed for want of jurisdiction. Rorem v. Dakota Co., No. 19HA-CV-14-1597, 2016 WL 2989144 (Minn. Tax Ct. 5/24/2016).
• Property tax: Motion to dismiss denied, lack of evidence as to income-producing nature of property. Minnesota law requires certain disclosures from owners of income producing property. Minn. Stat. §278.05, sub. 6(a). If those disclosures are not made, dismissal is appropriate. In this dispute, no disclosure was made and the county moved to dismiss. The taxpayer asserted that on the relevant date, the property was not income-producing. However, the taxpayer did not provide admissible evidence to support the assertion. The county, however, also failed to produce evidence that would permit the court to find that the property was income-producing on the date in question. Since the evidence before the court was insufficient for the court to determine whether the property was income-producing at the time in question, the motion to dismiss was denied. Sadat v. Scott Co., No. 70-CV-14-7269 (Minn. Tax Ct. May 20, 2016).
• Transfer pricing; comparable uncontrolled transactions method appropriate. In a memorandum opinion spanning nearly 150 pages, the tax court held that the IRS’s assessment of over $1 billion in a transfer pricing dispute involving Medtronic’s Puerto Rico affiliate could not withstand scrutiny. When related companies in different taxing jurisdictions trade with one another, a value must be assigned to the goods or services that flow between the companies in order to properly assess tax liability. Unlike when unrelated companies trade, assigning value to the exchange of goods or services between related entities can create an incentive to manipulate the assigned prices. Transfer pricing refers to the price assigned to these transfers between related companies. Taxpaying companies within the United States that trade with affiliated companies outside the United States are subject to extensive reporting requirements. Although Puerto Rico is a United States territory, companies based in Puerto Rico are considered foreign corporations for United States corporate income-tax purposes. This particular dispute involved the prices assigned to licensing of manufacturing intangibles for the production of medical products. One difficulty in transfer pricing disputes is properly determining the value of the contributions of the affiliate company to the taxpaying entity. In this case, Medtronic argued that the IRS had undervalued the importance of the affiliate, and in additional had used an improper method to assign the royalty rates. Medtronic argued that the comparable uncontrolled transactions (CUT) method was the appropriate valuation method. Using this method, the company argued, yielded an arm’s-length royalty rates of 29% for one product and 15% for the other. Expert testimony supported these rates. The taxpayer further argued that the IRS’s allocations using the comparable-profits method (CPM) were much greater than arm’s length and therefore were arbitrary, capricious, and unreasonable. The Service took the position that the CPM is the best method to determine the arm’s-length royalty rates on the intercompany sales of devices and leads and that making the accompanying adjustments did not result in an abuse of discretion. The Service further argued that since Medtronic US and Med USA performed all but one of the economically significant functions, the value the affiliated company provided was not significant, and therefore the Service’s CPM method was appropriate. The Service also criticized the use of the CUT method, arguing that the CUT method does not meet the relevant statutory and regulatory standard. The parties disputed the importance of manufacturing quality as a determinant of success in the medical device industry. In its exhaustive opinion, the court adopted the taxpayer’s methodology—the CUT method—but the court did not adopt fully the taxpayer’s calculations. The court determined that an appropriate arm’s-length rate for one product at issue would be 44% and set the rate at 22% for the other product at issue. The taxpayer had proposed 29% and 15%, while the IRS’s expert used an overall percentage of 49.4% for one tax year and 58.9% for another tax year (the IRS expert did not distinguish between the types of products). The court in this opinion did not calculate overall liability, and concluded by noting that “an appropriate order will be issued.” Medtronic, Inc. and Consolidated Subsidiaries v. Comm’r, No. 6944-11, 2016 WL 3221153 T.C. 6/9/2016).
• Income tax: Life insurance distribution includable in gross income; deficiency and penalties upheld. A taxpaying couple received an income-tax deficiency notice, along with associated fees and penalties totaling approximately $60,000 after the couple did not include the value of a life insurance distribution in their income. The court affirmed the assessments and penalties. The taxpayer husband had purchased a life insurance policy naming himself as the insured and as the policy’s owner, and his wife, Larita Mallory, as the direct beneficiary. The taxpayer could borrow against the policy, but the terms of the policy provided that the policy would terminate if the policy debt exceeded cash value, and the cash value would be used to extinguish the debt. In 2011, the policy debt exceeded the cash value. After giving Mr. Mallory notice, the insurance company terminated the policy. The insurance company issued a Form 1099-R for 2011 showing a gross distribution of $237,897.25, insurance premiums of $87,500, and a taxable amount of $150,397.25. The couple received the form, and brought it to the attention of their tax preparer. The tax preparer informed Mrs. Mallory that “she ‘was going to owe a bunch of money.’” The couple did not report the income from the Form 1099-R when they filed their 2011 taxes. They did, however, make the Service aware of the 1099-R by attaching it to their 1040; they also attached a handwritten note that said: “Paid hundreds of $. No one knows how to compute this using the 1099R from Monarch—IRS could not help when called—Pls send me a corrected 1040 explanation + how much is owed. Thank you.” The taxpayers argued that because they did not physically receive any payments in 2011, they did not have income in that year. Applying the long-standing principle of constructive income, the court explained that when the policy terminated, the policy debt—including capitalized interest—was extinguished. This extinguishment of debt had the effect of a constructive distribution of the cash value in the policy. The court went on to uphold the penalties, though the court expressly noted that “[w]e offer no view as to whether the handwritten note was an adequate disclosure of the relevant facts.” Mallory v. Comm’r, No. 14873-14, 2016 WL 3188933 (T.C. 6/6/2016).
• Procedure: Sundays, snow storms, and Washington’s Birthday force court to address novel question of jurisdiction. The IRS moved to dismiss a collection due process case for lack of jurisdiction on the ground that the petition was not filed within the 30-day period prescribed by section 6330(d). The parties agreed on all relevant facts. Using the 30-day period, the taxpayer’s petition would have been due 2/15/2015. February 15, however, was a Sunday, so the petition then became due Monday, February 16. That date, however, is Washington’s birthday, a holiday in the District of Columbia, so the due date became Tuesday, February 17. On the last date for timely filing of the petition, Tuesday, 2/17/2015, all Federal Government offices in the District of Columbia, including the tax court, were officially closed on account of Winter Storm Octavia. The petition was delivered to the court and filed on Wednesday, 2/18/2015. The petition was sent via Federal Express First Overnight service, which is the most expedited of FedEx delivery options. Unfortunately, at the time the petition was mailed, First Overnight was not a “designated delivery service” under I.R.C. sec. 7502(f)(2). The Service moved to dismiss the petition, arguing that the court did not have jurisdiction. Petitioner and amicus argued that the court could find jurisdiction, and advanced several theories under which the court could so find. The court determined that one of those theories was sufficient, and ultimately held that it had jurisdiction over the dispute. First, the rejected theories: although the taxpayer used the fastest available FedEx service, the “timely mailed, timely filed” rule of I.R.C. Sec. 7502(f) was inapplicable because Federal Express First Overnight service was not “designated by the Secretary” as an approved private delivery service as of the date on which the petition was filed. The court also rejected an appeal to equity: because the 30-day filing period prescribed by I.R.C. sec. 6330(d)(1) is jurisdictional, the court did not apply “equitable tolling.” The court was persuaded, however, to look to the Federal Rules of Civil Procedure because the relevant Tax Court Rule did not address how time shall be computed when the Clerk’s Office is inaccessible. The court looked to the Rules of Civil Procedure because another Tax Court Rule, Rule 1(b), provides that where “in any instance there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.” The Federal Rules of Civil Procedure have a rule, Fed. R. Civ. P. 6(a)(3)(A), that perfectly addresses the factual situation. Rule 6(a)(3)(A) provides that, “if the clerk’s office is inaccessible… on the last day for filing…, then the time for filing is extended to the first accessible day that is not a Saturday, Sunday, or legal holiday.” The court gave particular weight to the analogous Civil Rule, and concluded that the time for filing the petition should be “extended to the first accessible day that is not a Saturday, Sunday, or legal holiday.” That day was Wednesday, February 18. The court denied respondent’s motion to dismiss for lack of jurisdiction. Guralnik v. Comm’r, No. 4358-15L, 2016 WL 3165779 (T.C. 6/2/2016).
• Tax Injunction Act applies to initial question of jurisdiction. The Tax Injunction Act prohibits federal courts from “enjoin[ing], suspend[ing] or restrain[ing] the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” 28 U.S.C. 1341. Diversified Ingredients, a Missouri corporation, sought a declaration in federal court in Missouri that the state of Ohio did not have authority to tax Diversified. The corporation argued that federal courts consistently have found the Tax Injunction Act does not bar a threshold determination of whether a state has jurisdiction to impose the taxes it seeks to collect. The court rejected the putative taxpayer’s argument: It found that it lacked jurisdiction over Diversified’s claim based upon the TIA because the company had a plain, adequate, complete, speedy and efficient remedy under Ohio state law. In addition, the court held that the court lacked jurisdiction under the comity doctrine. Diversified Ingredients, Inc. v. Testa, No. 4:15-CV-1935RLW, 2016 WL 2932160 (E.D. Mo. 5/19/2016).
• Individual income tax; deductions disallowed, penalties upheld. A taxpaying couple, the Powells, owned and were either employees (Mrs. Powell) or independent contractor (Mr. Powell) at a company engaged in acquiring and selling petroleum marketing properties, appraising petroleum marketing properties, and negotiating gasoline and diesel fuel supply contracts. At issue in the case were deductions claimed for mileage, miscellaneous expenses, and a medical and dental deduction. The miscellaneous expense deduction related to the operation of an LLC that Mr. Powell referred to as the “hops business” (about 80 acres of land that petitioners own in Hillsborough, North Carolina, on which they produce hops). The court determined that only a portion of the taxpayers’ claimed mileage would be permitted to be deducted because the taxpayers failed to meet the strict substantiation requirements for a significant portion of the mileage. Similarly, the deduction related to the “hops business” was also disallowed for lack of substantiation. The taxpayers’ claimed medical and dental deduction was also disallowed, because the changes to petitioners’ adjusted gross income based on other disallowances meant that the expense no longer exceeded 7.5% of the taxpayers’ adjusted gross income (Section 213 now has a 10% AGI threshold). Finally, the court held the taxpayers liable for the penalty for an underpayment attributable to a substantial understatement of income tax under section 6662(a) and (b)(2). James Clement Powell and Lucy H. Powell v. Comm’r, No. 21839-14, 2016 WL 3200191 (T.C. 6/8/2016).
Mitchell Hamline School of Law