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

Notes & Trends – August 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.

CRIMINAL LAW
JUDICIAL LAW

Theft of motor vehicle: Participation in movement of motor vehicle required to ‘take’ the vehicle. Police responded to a call to find respondent sitting in the driver’s seat of J.V.’s vehicle, which was in J.V’s driveway with its engine running and reverse lights illuminated. J.V. told police that he was warming the vehicle before leaving for work. Respondent was charged with theft of a motor vehicle and challenged probable cause for the charge. The district court dismissed for lack of probable cause, and the state appealed, arguing that the district court improperly interpreted the term “takes” in Minn. Stat. §609.52, subd. 2(a)(17).

Minn. Stat. §609.52, subd. 2(a)(17), states that a person who “takes or drives a motor vehicle without the consent of the owner or an authorized agent of the owner, knowing or having reason to know that the owner or an authorized agent of the owner did not give consent” commits theft. The term “takes” is not defined in the statute, and has many dictionary definitions, demonstrating the ambiguity of this statutory term. The court of appeals looks to uses of the term in other parts of Minn. Stat. §609.52, subd. 2(a), as well as other related statutes, and the Supreme Court’s interpretation of former law on the subject of theft of a motor vehicle in State v. Maddaus, 163 N.W. 507 (Minn. 1917), concluding that the term “takes” requires that the person physically remove the personal property, rather than merely obtaining control over the personal property. Thus, “takes” in Minn. Stat. §609.52, subd. 2(a)(17), “requires that a person participate in the movement, however slight, of a motor vehicle.”

Because respondent did not move J.V.’s motor vehicle, the district court properly granted his motion to dismiss for lack of probable cause. State v. Somsalao Thonesavanh, Ct. App. 6/6/2016.

Restitution: Motion to correct sentence proper method to challenge authority to award restitution. Appellant was convicted of first-degree murder of a peace officer while the officer was engaged in official duties. As part of his sentence, he was ordered to pay $7,500 in restitution to the Crime Victims Reparations Board. After his conviction was affirmed on direct appeal, appellant filed a motion to correct his sentence under Minn. R. Crim. P. 27.03, subd. 9. The postconviction court denied his motion, finding it untimely under Minn. Stat. §611A.045, subd. 3(b), because he failed to challenge the restitution award within 30 days.

Rule 27.03, subd. 9, provides that the district court “may at any time correct a sentence not authorized by law.” An award of restitution is part of a sentence, so a defendant may challenge a restitution award that is contrary to law or applicable statutes, subject to the limitations set forth in Johnson v. State, 801 N.W.2d 173 (Minn. 2011), and State v. Coles, 862 N.W.2d 477 (Minn. 2015), which allow a Rule 27.03, subd. 9, motion to impact only the sentence, and not the underlying conviction. So, appellant’s Rule 27.03, subd. 9, motion was appropriate here, but it would not have been if, for example, the restitution award had been entered pursuant to a negotiated guilty plea in which the payment of restitution was a material part of the negotiation.

Next, the Supreme Court concludes that the district court had authority to award restitution to the Crime Victims Reparations Board, which is plainly established under existing law, and that the district court properly found appellant’s restitution challenge untimely under Minn. Stat. §611A.045, subd. 3(b), which requires that a challenge be filed within 30 days of receiving the restitution request or 30 days of sentencing, whichever is later. Harry Jerome Evans v. State, Sup. Ct. 6/8/2016.

Sentencing: Miller v. Alabama is expressly limited to juveniles. Appellant appealed from the summary denial of his postconviction petition, following his conviction for first-degree murder and kidnapping. After determining that appellant’s jury instruction claims are procedurally barred, the Supreme Court turned to appellant’s claim that his sentence of life imprisonment without the possibility of release is unconstitutional under Miller v. Alabama, 132 S.Ct. 2455 (2012), and that failing to extend Miller’s holding to him denies him equal protection.

The Court notes that Miller specifically limits itself to juvenile offenders, and points to “the crux of Miller’s holding,” “that children and adults ‘are constitutionally different… for purposes of sentencing.’” The Court also finds appellant’s equal protection claim meritless, because appellant is not similarly situated to the juvenile offenders at issue in Miller. The district court’s denial of appellant’s postconviction petition is affirmed. Joel Marvin Munt v. State, Sup. Ct. 6/16/2016.

Sex crimes: Felony communication with minor describing sexual conduct statute an unconstitutional content-based regulation of speech. Appellant was charged with felony communication with a minor describing sexual conduct and felony possession of pornographic work involving minors after it was found that she had sexually explicit online conversations and exchanged sexually explicit photographs online with a 15-year-old. The district court granted appellant’s motion for an order declaring the communication with a minor statute unconstitutional, and the state appealed.

In this case of first impression, the court of appeals finds that Minn. Stat. §609.253, subd. 2a(2), is unconstitutional as a content-based regulation of speech. First, the court finds that the statute is a content-based restriction on speech and that it implicates both protected and unprotected speech. It does not criminalize only speech integral to criminal conduct. Sexual conduct between a child and an adult is the offense with an arguable causal connection to the communication of a minor describing sexual conduct. But the court has previously found that soliciting sex from a child is speech integral to the offense of sexual conduct between a child and an adult. Minn. Stat. §609.253, subd. 2a(2), however, sweeps more broadly, and prohibits speech that is one step removed from speech thus far recognized as speech integral to criminal conduct. The link between the communication prohibited by the statute and actual instances of child abuse is contingent and indirect. The statute also is not limited to criminalizing obscene speech, because it reaches more than communications that appeal to the prurient interest under contemporary community standards, nor does it exclude from its ambit speech which has social value. Finally, the court rejects the state’s argument that the statute is analogous to statutes prohibiting child pornography, which criminalize unprotected speech, finding that the justification for finding child pornography unprotected speech—the state’s interests in protecting the children exploited in the production process—is not applicable to Minn. Stat. §609.253, subd. 2a(2).

The court then finds that the statute is facially overbroad in violation of the 1st Amendment. Several parts of the statute give rise to its substantial overbreadth, including its intent requirement (“intent to arouse the sexual desire of any person”), the requirement that the communication need only be “relating to or describing sexual conduct,” its lack of a definition for “engage” (leaving open the possibility that one-way communication is included), and that the communication need not be direct, exclusively between the adult and the child, or concerning sexual conduct between the adult and the child. The statute also cannot be narrowly construed, because to do so would require the court to add language to the statute.

Last, the court finds that this content-based regulation is unconstitutional, as it fails strict scrutiny. While the state has a compelling interest in prohibiting “grooming” of children, the statute is not narrowly tailored, as it restricts more speech than necessary to achieve the state’s interest of protecting children from sexual predators on the internet. State v. Krista Ann Muccio, Ct. App. 6/20/2016.

Sex crimes: Promotion of prostitution and solicitation of individuals to practice prostitution statute not substantially overbroad. On appeal, appellant argues that his conviction for soliciting and promotion of prostitution and conspiracy to commit sex trafficking should be reversed, because the solicitation and promotion of prostitution statute is facially overbroad. Minn. Stat. §609.322, subd. 1a(1)-(2), makes it a crime for a person, “while acting other than as a prostitute or patron,” to intentionally “solicit[ ] or induce[ ] an individual to practice prostitution” or “promote[ ] the prostitution of an individual.” The first question is whether the statute regulates speech that the 1st Amendment protects. The state argues that the statute reaches only speech used as an integral part of criminal conduct, which is one category of unprotected speech. The conduct at which the statute is aimed—prostitution—is illegal in Minnesota, and the statute regulates speech directly linked to and designed to facilitate the commission of that crime. This speech has no other lawful purpose.

The Court rejects appellant’s argument that the statute also criminalizes the solicitation and promotion of consenting adult actors to engage in sexual contact or penetration for the production of sexually explicit films and photographs, which the court previously found to be protected speech. The statute criminalizes the solicitation and promotion of individuals to engage in sexual conduct only if the sexual conduct is done for the purpose of satisfying the actor’s sexual impulses, while hiring adults to perform in pornography is done for the purpose of making a film or photograph. Even if the statute restricts some amount of protected speech, the statute is not substantially overbroad in relation to the statute’s plainly legitimate sweep. State v. Antonio Dion Washington-Davis, Sup. Ct. 6/29/2016.

– Frederic Bruno
Bruno Law

– Samantha Foertsch
Bruno Law

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

Severance payment; executive not entitled. A bank executive was not entitled to a one-year severance agreement following his discharge. The 8th Circuit upheld a determination by the Federal Deposit Insurance Company (FDIC) that the payment was not a vested benefit and was impermissible under its regulations. Rohr v. Reliance, 2016 U.S. App. LEXIS 11185 (6/21/2016) (unpublished).

FELA, not in course of job. A railroad employee injured when struck on the head by a shovel swung by a co-worker was not entitled to relief under the Federal Employee’s Liability Act (FELA), the workers’ compensation law for railway workers. The 8th Circuit Court of Appeals, affirming the Hennepin County District Court, ruled that the co-worker was acting “jokingly,” which was not within the scope of his employment, thus barring the claim under FELA. Poole v. Soo Line Railroad, 2016 Minn. App. LEXIS 568 (6/13/2016) (unpublished).

Non-renewal of employment; university clinician loses. A clinical faculty member at the University of Minnesota lost his challenge to nonrenewal of his annual contract. The court of appeals, hearing the case on certiorari, held that the university’s decision was not arbitrary, unreasonable, or lacking evidentiary basis. Gruenstein v. Regents of the University of Minnesota, 2016 Minn. App. LEXIS 581 (6/13/2016) (unpublished).

Public sector employees; two discrimination cases dismissed. A pair of public sector employees lost wrongful termination discrimination cases before the 8th Circuit Court of Appeals recently.

An African-American corrections employee’s racial discrimination case was dismissed on grounds that similar situated caucasian employees were treated the same and the employer had legitimate, non-discriminatory reasons for the discharge. Henry v Hobbs, 2016 U.S. App. LEXIS 9784 (5/31/2016) (unpublished).

A woman city employee’s claim of gender bias because a less qualified male replaced her was dismissed, too. The court also rejected a claim of retaliation due to the former employee’s affiliation with two other high-level personnel in the governmental unit. DePriest v. Milligan, 2016 U.S. App. LEXIS 9630 (5/26/2016) (unpublished).

Overtime pay; employer entitled to costs. An employer who prevailed in a claim brought by employees seeking overtime compensation for misclassification as exempt employees under the Fair Labor Standards Act (FLSA) was entitled to its costs and disbursements upon weighing the case. The 8th Circuit Court of Appeals vacated and remanded a lower court ruling denying costs to the prevailing employer, who had not raised the issue of costs after the jury returned the verdict in its favor. The employer, despite the silence below, is entitled to a ruling by the lower court on the issue of entitlement to costs and disbursements. Lochridge v. Lindsey Management Co., Inc., 2016 U.S. App. LEXIS 1000 (6/2/2016) (unpublished).

Disability insurance benefits; denial upheld. A denial of disability insurance benefits for a former farm worker who claimed disability due to conditions including gout, arthritis, back pain, and obesity was affirmed. The 8th Circuit held that a determination by an administrative law judge (ALJ) that the employee had residual functional capacity was supported by the evidence and the record was adequately developed to make that determination. Buford v. Colvin, 2016 U.S. App. LEXIS 10001 (6/2/2016) (unpublished).

Arbitration agreement; split decision. The mandatory arbitration agreement that an employer required an employee to sign, waiving their rights to pursue class actions for employment disputes, did not constitute a violation of the National Labor Relations Act. The 8th Circuit reversed a determination of a violation by the employer for its mandatory arbitration agreement, but it did uphold a determination by the National Labor Relations Board that the employer violated the law because its employees could “reasonably interpret” the arbitration agreement to limit their rights to file any unfair labor practice charges. Therefore, the 8th Circuit enforced the order with respect to that issue, which it determined was not time-barred. Cellular Sales of Missouri v. National Labor Relations Board, 2016 U.S. App. LEXIS 10002 (6/2/2016) (unpublished).

Retaliation for reporting fraud; federal claims dismissed. A pair of claims asserted under a pair of federal investor protection laws by an employee who claimed he was wrongfully discharged in retaliation for reporting fraud in a publicly traded company was dismissed. The 8th Circuit, affirming a ruling of U.S. District Court Judge Donovan Frank in Minnesota, held that the employee did not engage in statutorily protected conduct under the Sarbanes-Oxley Act and the Dodd Frank Wall Street Reform and Consumer Protection Act because his reports of improper revenue projections were “objectively unreasonable” and, therefore, not statutorily protected. Beacom v. Oracle Am., Inc., 2016 U.S. App. LEXIS 10183 (6/6/2016) (unpublished).

Retaliatory discharge; workers compensation claim upheld. An undocumented immigrant, who claimed that he was discharged in violation of the Minnesota Workers Compensation Act after he filed a worker’s compensation claim, was entitled to pursue the claim. The Minnesota Court of Appeals, reversing the decision of summary judgment by the Anoka County District Court, held that there were genuine issues of material fact whether the employee suffered “adverse action” by being placed on involuntary leave, without pay or benefits, after the employer learned of her undocumented status, following a deposition in her workers compensation claim. Sanchez v. Dahlke Trailer Sales, Inc., 2016 Minn. App. LEXIS 555 (6/6/2016) (unpublished).

– Marshall H. Tanick

Hellmuth & Johnson, PLLC

ENVIRONMENTAL LAW
JUDICIAL LAW

8th Circuit strikes down key provisions of Minnesota Next Generation Energy Act. Minnesota is one of many states that attempted to regulate greenhouse gas emissions within its borders by passing the Minnesota Next Generation Energy Act. And like many of those states, Minnesota was sued by entities that generate electricity in coal-fired facilities in and outside of the borders of the state. The statute at issue was intended to prevent utilities from providing electricity to Minnesota generated by any new large energy facilities in a transaction that would contribute to or increase statewide power sector carbon dioxide emissions.

The 8th Circuit upheld the district court’s finding that part of the Minnesota Next Generation Energy Act, Minn. Stat. 216H.03, subd. 3(2) and (3), is an attempt to regulate out-of-state commercial transactions, which cannot be done at the state level without approval of Congress. The reasoning by the three-judge panel was varied. The panel opinion of the court found that the statutory provisions violated the dormant Commerce Clause by regulating purely extraterritorial economic activity. Two of the judges disagreed with the dormant Commerce Clause analysis and found that the statutory provisions are preempted by the authority assigned to the Federal Energy Regulatory Commission under the Federal Power Act. In addition, one of the judges found additional preemption by the Clean Air Act, which is the exclusive source of authority for the regulation of interstate emissions.
North Dakota v. Heydinger, No. 14-2156 (8th Cir. 6/15/2016).

Supreme Court declines review of EPA’s mercury rule. The Supreme Court declined without comment to take up a renewed challenge to the Obama administration’s mercury rule. The rule is a regulation of the emissions of mercury and air toxins (MATS) from power plants. Opponents of the rule successfully challenged it in front of the Supreme Court in 2015 on the grounds that the EPA had acted unreasonably in failing to consider compliance costs. Michigan v. EPA, 135 S.Ct. 2699 (2015).

After the case was remanded by the Supreme Court last year, EPA issued findings on compliance costs and determined that it nevertheless is appropriate and necessary to regulate MATS. EPA’s findings were challenged by 20 states and several coal industry associations, which estimated that the mercury rule would cost $9.6 billion a year and would raise consumer electricity bills. The Supreme Court’s failure to take up the case again means that the mercury rule will apply to about 1,400 electricity generating units at 600 power plants. Industry experts predict that the rule will force older, less efficient coal plants to prematurely shut down because upgrading emissions control equipment is cost-prohibitive. Michigan v. EPA, No. 15-1152 (U.S. 6/13/2016).

ADMINISTRATION ACTION

OSHA delays implementation of new anti-retaliation provisions. OSHA’s new anti-retaliation provisions were scheduled to go into effect on 8/10/2016. OSHA has decided to delay implementation until 11/1/2016. The delay was designed to allow OSHA more time for additional outreach and development of educational materials and guidance for employers. The new provisions require employers to inform employees of their right to report work-related injuries and illnesses without fear of retaliation. The provisions also require that an employer must have a reasonable procedure in place for reporting work-related injuries and illnesses that does not deter employees from reporting.

Prior to the implementation deadline, employers should review policies for consistency with the new provisions. Managers should be trained to be extremely timely and diligent in documenting justifications for employee firing decisions in order to show that termination was for reasons other than reporting an injury or illness.

– Vanessa Johnson
Parkway Law LLC

FEDERAL PRACTICE
JUDICIAL LAW

Failure to file amended notice of appeal following denial of Rule 59 motion. The 8th Circuit determined that it had jurisdiction over an appeal despite the appellant’s failure to file the amended notice of appeal required by Fed. R. App. P. 4(a)(4)(B)(ii) following the denial of its Rule 59 motion, finding that the requirements of Fed. R. App. P. 3 are to be “liberally construe[d],” that the filing of an Amended Statement of Issues and an Amended Designation of Record on Appeal were the “functional equivalent” of an amended notice of appeal, and that the appellee had not suffered any prejudice. Lincoln Composites, Inc. v. Firetrace USA, LLC, ___ F.3d ___ (8th Cir. 2016).

Dismissal without prejudice not a final appealable order. Where Judge Frank dismissed the plaintiff’s DPPA claims without prejudice and with leave to replead, but also cautioned the plaintiff that he would consider awarding costs and attorney’s fees if her amended complaint failed to cure the deficiencies in her initial complaint, the plaintiff declined to amend her complaint and instead asked Judge Frank to dismiss her claims with prejudice, and the plaintiff then commenced an appeal prior to the entry of judgment, the 8th Circuit dismissed the appeal for lack of jurisdiction, declining to adopt a 3rd Circuit rule that allows an appeal once a plaintiff informs the district court that she intends to stand on her complaint. Sapp v. City of Brooklyn Park, ___ F.3d ___ (8th Cir. 2016).

Removal; remand; existence of federal question; attorney’s fees. The 8th Circuit reversed the dismissal of an action that had been removed on federal question grounds, applying the “well-pled complaint rule,” and finding that despite the plaintiff’s multiple references to an IEP, the complaint did not “implicate” the IDEA. However, it denied the plaintiff’s request for an award of attorney’s fees under 28 U.S.C. §1447(c), finding that the defendants “were not without a reasonable basis to remove the action.” Moore ex rel. D.S. v. Kansas City Public Schools, ___ F.3d ___ (8th Cir. 2016).

Preliminary injunction; “fair chance of prevailing” versus “likely to prevail;” waiver of bond. Affirming Chief Judge Tunheim’s issuance of a preliminary injunction in a NEPA environmental dispute, the 8th Circuit found that Judge Tunheim had properly applied the “fair chance of prevailing” standard rather than the more rigorous “likely to prevail” standard. The 8th Circuit also agreed with Judge Tunheim’s decision not to require a bond based on the “public interest” in environmental litigation, finding that the waiver of the bond was “permissible.” Richard/Wilkin Joint Powers Authority v. United States Army Corps of Engineers, ___ F.3d ___ (8th Cir. 2016).

Dismissal of claims as sanction for failure to appear for depositions affirmed. The 8th Circuit affirmed the striking of pleadings in a civil forfeiture action where the claimants failed to appear for depositions on multiple occasions and had been previously warned that their failure to appear for depositions would result in the dismissal of their claims. United States v. $11,071,188.64, ___ F.3d ___ (8th Cir. 2016).

Application of Minnesota peer review privilege rejected in case raising federal and state law claims. Magistrate Judge Noel declined to apply Minnesota’s statutory peer review privilege in a case raising both federal and state law claims, finding that federal privilege law applied to the federal and state claims, and determining that the policies underlying the peer review privilege “did not outweigh the need for probative evidence.” Rumble v. Fairview Health Services, 2016 WL 3509221 (D. Minn. 5/18/2016).

Leave to file documents under seal denied; public right of access. Denying defendants’ unopposed motion to seal information submitted in support of their motion to transfer venue, Judge Wright found that the defendants had made “no effort to support these bare assertions [relating to the need for confidentiality] with any evidence,” that “most, if not all, of the information… was publicly available,” and that the court would “not permit the parties to stipulate away the public’s right of access without an adequate basis for doing so.” Skky, LLC v. Facebook, Inc., ___ F. Supp. 3d ___ (D. Minn. 2016).

Multiple putative pricing-related consumer class actions dismissed. Judge Frank dismissed a putative consumer class action pursuant to Fed. R. Civ. P. 9(b), finding that all of the plaintiff’s claims were subject to Rule 9(b), and that the plaintiff’s “conclusory allegations” failed “to satisfy Rule 9(b)’s particularity requirement.” Nunez v. Best Buy Co., 2016 WL 3189197 (D. Minn. 6/7/2016).

Judge Doty also dismissed a putative consumer class action, finding that the plaintiff’s fraud allegations were “conclusory and speculative.” Azimpour v. Select Comfort Corp., 2016 WL 3248231 (D. Minn. 6/13/2016).

Retroactivity of recent federal rules amendments. Where the plaintiff commenced its action in November 2015 with a complaint that met the pleading requirements of Fed. R. Civ. P. 84’s Form 18, and Form 18 was later abrogated pursuant to Federal Rules amendments that took effect on 12/1/2015 pursuant to a Supreme Court order that provided that those amendments would govern in pending cases “insofar as just and practicable,” Chief Judge Tunheim denied the defendants’ motion to dismiss premised on the plaintiff’s failure to comply with the amended pleading rules, finding that it would be neither “just” nor “practicable” to require the plaintiff to comply with rules that were not in effect when the action was commenced. Polaris Indus., Inc. v. Arctic Cat Inc., 2016 WL 3541541 (D. Minn. 6/23/2016).

Request for attorney’s fees slashed. Where the parties in a putative class action raising FCRA and FACTA claims entered into a settlement that made vouchers available to members of the class, and the value of the vouchers redeemed totaled only $757, Judge Frank awarded the plaintiffs just over $38,500 in attorney’s fees rather than the more than $192,000 they requested, finding that the fee request was “disproportionate to the benefit conferred on the class.” Rouse v. Hennepin County, 2016 WL 3211814 (D. Minn. 6/9/2016).

28 U.S.C. §1292(b); motion to certify order for interlocutory review denied. Judge Nelson denied one defendant’s motion to certify an issue for interlocutory appeal under 28 U.S.C. §1292(b), finding that it could establish none of the three factors required to support its request for certification. In Re: RFC & Rescap Liquidating Trust Lit., 2016 WL 3410332 (D. Minn. 6/20/2016).

– Josh Jacobson

Law Office of Josh Jacobson

REAL PROPERTY
JUDICIAL LAW

Boundary line; easement by necessity; practical location of boundaries; good faith purchaser. Improvements to Parcel A encroached on to Parcel B, which was previously under common ownership. The septic system servicing Parcel A was located on Parcel B and the driveway servicing Parcel A ran across Parcel B. The parcels were conveyed to family members, who obtained mortgages at different banks. The mortgages on both parcels were ultimately foreclosed and Parcel B was sold to a third party, who had knowledge of the encroachment issues. The bank owning Parcel A commenced suit and the district court realigned the boundary between the parcels. The court of appeals affirmed and held that realigning the boundary line between two parcels previously under common ownership by practical location was warranted where improvements straddle the boundary line between the parcels and the owner of the encroached-upon parcel knew of the encroachments when he purchased the property and obtained the property at a discount because of the encroachments. Furthermore, an easement by necessity for a driveway was warranted where moving it would pose a problem based on how the house was constructed and would cause seasonal issues with rain and snow based on the slope and elevation of the property. Finally, the court of appeals held that the purchaser of Parcel B was not a good faith purchaser under Minnesota’s Torrens Act because he had actual knowledge of the unrecorded interests in the property. Actual knowledge of unrecorded interests in property, not just unrecorded instruments, defeats good faith purchaser status on Torrens property. In re Wells Fargo Bank, N.A., 2016 WL 3582593, A15-1557 (Minn. Ct. App. 2016).

– Michael Kreun

Beisel & Dunlevy PA

TAX
JUDICIAL LAW

Minnesota’s repeal of MTC’s appointment formula not unconstitutional. The Minnesota Supreme Court affirmed the tax court’s determination that the Legislature’s 1987 repeal of the Multistate Tax Commission’s (MTC) apportionment formula was constitutional. The tax court, sitting en banc, had rejected Kimberly-Clark’s argument that the Legislature’s enactment of the Multistate Tax Commission’s (MTC) apportionment formula was a contractual obligation that it unconstitutionally impaired when it repealed the use of that formula.

In affirming, the Supreme Court held that even if the state had undertaken a contractual obligation by adopting the apportionment formula, Article X section 1 of the Minnesota Constitution bars the state from “surrendering, suspending, or contracting away its authority to amend or repeal tax provisions.” Moreover, previous Minnesota case law had rejected breach of contract and unconstitutional impairment of contract claims by holding that promises found in statutes are inherently limited by the Legislature’s power to amend a statute.

Kimberly-Clark raised the “unmistakability doctrine” to argue that Minnesota could not repeal the apportionment formula without withdrawing from the MTC. A rule of contract construction, the unmistakability doctrine states that the sovereign powers of a state cannot be contracted away unless in “unmistakable” terms. The Supreme Court rejected this argument, finding no unmistakable or express promise surrendering the state’s sovereign powers (i.e., the ability to repeal the legislation) within the statute. Kimberly-Clark Corp. v. Comm’r, 2016 WL 3474383 (Minn. 2016).

Capitalized interest added to loan principal not deductible interest for cash method taxpayers. Married taxpayers purchased a rental property from family friends. Rather than obtain a bank mortgage on the property, the taxpayers executed a mortgage on the property and a promissory note payable to the sellers. The rental property was not as profitable as petitioners had hoped, and the taxpayers did not make any payments toward the promissory note for 2008 or 2009. At some point, the parties entered two mortgage modification agreements, each of which capitalized $54,000 of unpaid interest into the mortgage principal. The taxpayers then claimed mortgage interest expense deductions for the amounts of the capitalized interest on their Schedules E.

The commissioner disallowed the deduction, and the court affirmed. The court explained that “[w]hen a lender capitalizes unpaid interest by adding the unpaid interest amount to the loan principal, a cash basis borrower is not entitled to a current interest deduction for the interest that is added to the loan’s principal balance.” The taxpayers did not pay mortgage interest for 2008 or 2009 in cash or its equivalent, instead, the mortgage modification allowed petitioners to postpone the paying of interest. Therefore, the court concluded, the taxpayers were not entitled to deductions for the interest that was capitalized into the unpaid mortgage principal. The court upheld accuracy-related penalties. Slavin v. Comm’r, No. 7785-12S, 2016 WL 3511983 (T.C. 6/21/2016).

Property tax: motion to exclude testimony denied. In this property tax dispute on remand from the Minnesota Supreme Court, taxpayers KCP Hastings moved to strike Dakota County’s supplemental appraisal motion on three grounds: (1) using appraisals as direct testimony was a violation of due process; (2) Dakota County should be judicially estopped from using the discounted-cash-flow method because it had previously argued it was an inappropriate method; and (3) Dakota County should be barred from using an appraiser who did not testify during the original proceedings. The tax court denied the motion in limine.

The court reasoned that KCP Hastings had failed to raise the first ground either before the tax court, or in its appeal to the Minnesota Supreme Court, so the argument was outside the grounds of the remand. The court nonetheless addressed the merits of the argument, finding that using appraisals as direct testimony is an established practice in Minnesota, in federal courts, and proceedings before federal agencies. The court analyzed the practice under the three factors the United States Supreme Court set out in Mathews v. Eldridge, 424 U.S. 319, 333 (1976) and determined KCP Hastings’ right to due process was not violated by the procedure. The court also rejected the judicial estoppel argument, holding that the conditions for judicial estoppel were not met in the case because the county had failed to prevail on the position that the discounted-cash-flow method was inappropriate in previous cases in front of the tax court and the Minnesota Supreme Court. Finally, the court held there was no reason that a different witness could not supplement testimony originally offered by another witness. KCP Hastings, LLC v. Dakota Co., No. 19HA-CV-11-2713, 2016 WL 3348937 (Minn. T.C. 6/7/2016).

$85,000 sales and use tax appeal dismissed with prejudice. After receiving a 60-day extension to provide additional documents to the commissioner, appellant’s subsequent request for an additional postponement of his trial to focus on his struggling business was denied. Appellant failed to appear at trial, and the matter was dismissed with prejudice. Miah v. Comm’r, No. 8811-R, 2016 WL 3348981 (Minn. T.C. 6/10/2016).

Summary judgment granted. Due to an IRS audit report that increased appellant’s 2010 taxable revenue, the Minnesota Commissioner of Revenue accordingly adjusted appellant’s Minnesota taxable income, resulting in $1,248.58 of unpaid Minnesota tax, penalty, and interest. Appellant denied knowledge of the IRS audit report and asserted that he had no unreported income for 2010. The commissioner served appellant with requests for admission, including a request for admission that the Federal Form 1099 issued by Hanesbrands, Inc. was his proper revenue for the year. Appellant failed to respond to the commissioner’s requests for admission, resulting in a deemed admission. Thus appellant’s income was conclusively established on the record. Because non-receipt was Brouillette’s sole basis for challenging the commissioner’s assessment, there are no material facts in dispute and the commissioner is, as a matter of law, entitled to judgment affirming her assessment. Brouillette v. Comm’r, No. 8805-R, 2016 WL 3633297 (Minn. T.C. 6/30/2016).

ADMINISTRATIVE ACTION

New partnership audit rules to take effect in 2018. Students of partnership taxation learn, usually on the first day, that partnerships don’t pay tax, partners do. The students learn that this “flow through” is a main distinguishing factor between corporate and partnership taxation. When it takes full effect, Title XII of the Bipartisan Budget Act of 2015 (HR 1314, P.L. 114-74, 11/2/15) will complicate this early lesson. The provisions of the Code that provide for auditing and adjusting income tax liabilities of partnerships and partners will change significantly for certain large or complex partnerships. The new procedures are designed to reduce the audit burden on the Service by introducing a tax on partnership audit adjustments that can be imposed at the partnership level (the rules also provide an elective method for imposing the tax at the partner level, and there are simplifying conventions for small partnerships). Once enacted, the rule change is expected to raise about $13 billion over the 10-year budget cycle. Minnesota has not yet announced how the new federal rules might affect audits of Minnesota partnerships.

Birth of baby sufficiently ‘unforeseen’ to qualify parents for Section 121 exclusion. In Private Letter Ruling 2016-28-002 (4/11/2016), the Service ruled that the birth of a second child constituted an unforeseen circumstance when the taxpayers purchased their two-bedroom condo. Section 121 permits the exclusion of up to $500,000 (for married couples) of gain on the sale of a home. To qualify for the exclusion, however, the home must be used as the taxpayer’s principal residence for at least two of the previous five years. A pro rata exclusion is also permitted if the taxpayer fails to meet the temporal requirement and that failure is caused by “change of employment, health conditions, or such other unforeseen circumstances as may be specified by the Secretary.” The regulations list a number of unforeseen-circumstance safe harbors, including involuntary conversion of the home; death; natural or man-made disasters or acts of war or terrorism resulting in a casualty to the home; and multiple births resulting from the same pregnancy. These taxpayers were able to take advantage of the exclusion because the Service, in the Private Letter Ruling, was persuaded that the facts and circumstances established that the sale of the residence was caused by the “unforeseen circumstance” of the child’s birth.

– Morgan Holcomb

Mitchell Hamline School of Law

– Jessica Dahlberg

Grant Thornton

TORTS & INSURANCE
JUDICIAL LAW

First-party insurance coverage; bad faith and taxable costs. Plaintiff was injured in a car accident. After recovering from the at-fault driver’s insurance company, plaintiff sought to recover underinsured motorist (UIM) benefits from defendant insurer. Defendant paid plaintiff $1,200 in UIM benefits, and offered to settle his claim for an additional $26,800. Plaintiff rejected this offer. After trial, the jury determined plaintiff’s personal injury damages to be $412,764.63, which was reduced to $255,956.59 after collateral offsets were deducted. Because the limits of the policy were $100,000, and because defendant had already paid $1,200, judgment was entered in the amount of $98,800. Following a bench trial on plaintiff’s bad-faith claim under Minn. Stat. §604.18, the court awarded additional costs in the amount of $36,000 and attorneys’ fees. Plaintiff appealed.

The Minnesota Court of Appeals affirmed. The issue on appeal was whether the phrase “proceeds awarded” contained in Minn. Stat. §604.18 meant the $98,800 judgment entered in plaintiff’s favor or $255,956.59—the amount of the jury’s verdict less collateral source offsets. The court determined that “proceeds awarded” meant the amount of the judgment, which took into account the policy’s limits. The court reasoned that while the phrase “proceeds awarded” was ambiguous, this interpretation was supported by legislative history, the use of the phrase “proceeds awarded” throughout Minn. Stat. §604.18, and the use of the term “proceeds” in other cases. Wilbur v. State Farm Mut. Auto. Ins. Co., No. A15-1438 (Minn. Ct.
App. 6/20/2016). http://mn.gov/law-library-stat/archive/ctappub/2016/opa151438-062016.pdf

– Jeff Mulder

Bassford Remele

 

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