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

Notes & Trends – December 2016

Current developments in judicial law, legislation, and administrative action together with a foretaste of emergent trends in law and the legal profession for the complete Minnesota lawyer.

COMMERCIAL AND CONSUMER LAW
JUDICIAL LAW

• History repeats itself. Ever since the Uniform Commercial Code wrote a statute of frauds into the code, there has been debate over whether it creates more fraud than it prevents, and whether it is a relic of past procedure that enlightened law should discard as many of the legal systems in the world have done. See, e.g., United Nations Convention on Contracts for the International Sale of Goods Article 11. American law has not agreed with discarding the concept of the statute, as it avoids disputes over whether there was an agreement, and indeed the protection of the statute’s concept was expanded when a spate of “lender liability” cases arose a while ago. As a result, much of the history under the UCC of trying to avoid the statute is being repeated.

Exhibit One is Figgens v. Wilcox, ___ N.W.2d ___, No. A14-1358 (Minn. 2016). Figgens owned a business and received a loan from Grand Rapids State Bank. That loan matured in late 2009 and a balloon payment was due. Figgens entered into negotiations to refinance instead, and allegedly the bank’s CEO advised Figgens that he need not pay while negotiations were ongoing. Figgens also sought financing at Woodland Bank, and Woodland contacted Grand Rapids and was informed Figgens had a poor payment record and was delinquent. This allegedly was false. As a result Woodland backed off and Figgens alleged that allowed Grand Rapids to charge a higher rate, so he sued for intentional misrepresentation. Grand Rapids moved to dismiss the suit on the basis of Minn. Stat. §513.33 (2014) enacted in 1985 in response to the then-farm crisis.

Minn. Stat. §513.33 provides in part that a debtor may not maintain an action on a credit agreement unless the agreement is in writing… and is signed by the creditor and the debtor. Figgens in defense asserted the statute did not apply because:

(1) there was no enforceable agreement as no consideration; and
(2) promissory estoppel.

The court thought the use of “agreement” as opposed to “contract” showed an intent to address a broader set of interactions than those just qualifying as enforceable contracts citing legal dictionaries. It then had no trouble finding a “credit agreement” existed by the actions of the parties. While the court did not say so, this seems sound in comparison to the UCC as UCC §2-201 uses “contract” and the Code makes the same differentiation between “agreement” (UCC §1-201(b)(3)) and “contract” (UCC §1-201(b)(12)). Whether it is wise policy is perhaps another matter.

The court also refused to create a judicial exception for promissory estoppel given that the statute was plain, clear, and unambiguous. In reference to the UCC, that has not stopped court use of estoppel. See, e.g., Hitzke v. Easterday, 285 Wis. 2d 807, 701 N.W.2d 654 (Wis. Ct. App. 2005); but see, Siesta Sol, LLC v. Brooks Pharmacy, Inc., 617 F. Supp.2d 38 (D.R.I. 2007). The unsuccessful amendments to UCC Article 2 in the amended Official Comment to amended §2201 encouraged the estoppel exception, which may well be one reason for the lack of success of that effort, and evidences the continued adherence to the concept of a statute of frauds in American law. Whether it is consistent with the more relaxed approach of the Minnesota statute is a question worth consideration.

Fred Miller
Retired G.L. Cross Research Professor, University of Oklahoma

 

ENVIRONMENTAL LAW
LOOKING AHEAD

• New survey indicates an increase in company disclosure of environmental data. The pressure on companies to release environmental, social and governance (ESG) data has increased dramatically in recent years, according to a new survey by Pricewaterhouse Coopers LLP (PWC). See “Investors, Corporates and ESG: Bridging the Gap,” October 2016. The study found that 81 percent of S&P 500 companies published sustainability reports in 2015, which was up from 20 percent in 2011. Company stakeholders increasingly are looking to this data in addition to financial metrics when making decisions.

Investors in particular want to evaluate a company’s exposure to risk posed by such variables as climate impact, stewardship of natural resources, quality and safety of company products, and worker safety. Thirty-one percent of investors surveyed said that ESG data is very important for equity investment decisions, and 61 percent of corporates say that this data is very important to the core business strategy.

Although it is an accepted premise that investors want and expect to see ESG data, PWC concluded that investors do not know how to utilize this information when making investment decisions. This disconnect is due in part to the problem of not being able to compare data, as more than nine out of ten investors said that it is not easy to compare one company’s data to another’s. The survey found that 80 percent of corporates follow Global Reporting Initiative (GRI) standards, while 43 percent of investors prefer Sustainability Accounting Standards Board (SASB) standards.

These problems may change in the near future as the SASB plans to finalize industry specific standards in 2017. In addition, the Securities and Exchange Commission (SEC) recently sought public comment about environmental compliance and sustainability disclosures. Specifically, the SEC asked about increasing or decreasing the environmental disclosure required and what format should be used.

• Environmental groups sue MPCA over alleged mining pollution. Three environmental groups have acted to address alleged pollution from the state of Minnesota’s taconite mining industry. The groups brought a lawsuit focusing on one taconite mine and 10-mile long tailings waste pit owned by U.S. Steel Corporation in Mountain Iron, Minnesota. The waste pit at issue continues to operate despite the expiration of its permit 24 years ago.

The Minnesota Pollution Control Agency (MPCA), which issues these permits, has authorized the mine to continue operations while the MPCA has worked on a new permit for years. It plans to withhold the new permit until after it has revised the standard regulating the pollutant sulfate, which forms when waste rock is exposed to air and water. The new standard isn’t expected until 2018, and the environmental groups say that this is not soon enough. The lawsuit seeks to require the permit by a certain date in the near future and that it require compliance with state discharge standards that the mine allegedly violates currently.

The U.S. Steel site is not the only one being targeted by environmental groups. At least 15 mines are operating with expired permits in Minnesota. This has led to attention from the U.S. Environmental Protection Agency (EPA), which has pressured the MPCA to release new mining permits for these mining operations. EPA started an investigation last year into the state’s regulation of mining that is expected to take years. Minnesota Center for Environmental Advocacy v. Minnesota Pollution Control Agency, Case No. 62-CV-16-6257.

• Minnesota regulates pesticide usage to protect bees. Gov. Mark Dayton recently issued an executive order designed as the toughest standard in the United States to combat the serious decline in honey bee population identified in recent years. The new standard requires that farmers prove “an imminent threat of crop loss” before being allowed to spray agricultural pesticides called neonicotinoids. These pesticides are used as seed coatings on most corn and soybean seeds, and were identified four years ago as one of the causes of the honey bee decline. The honey bee decline could have a detrimental impact on the state’s $90 billion agricultural industry, which relies on the bees as pollinators for crops.

This strict regulation gets out in front of the EPA, which is also looking at regulating neonicotinoids. Further use restriction in Minnesota is possible as well, with the Department of Agriculture (MDA) proposing a new program to regulate the treatment of seeds with these pesticides. This MDA program will require approval from the state Legislature.

Vanessa Johnson
Parkway Law LLC

 

FAMILY LAW
JUDICIAL LAW

• Decision in Curtis v. Curtis. The long-anticipated decision from the Supreme Court in Curtis v. Curtis is finally here. The issue in the case was whether, and under what circumstances, a district court may ground its spousal maintenance decision on an expectation that the claimant reallocate her property award to maximize income.

The parties were married in 1990 and had two children, one of whom was emancipated. Husband was a dentist and had earned a substantial income. Wife was a homemaker. The parties stipulated that wife would receive 57 percent of the marital estate and husband would receive 43 percent of the marital estate. Wife’s share totaled about $2.2 million and consisted of the homestead and a portfolio of investments. They could not resolve wife’s spousal maintenance claim and the district court, following trial on that issue, denied her request because it found that wife could meet her needs by reallocating her portfolio from growth-oriented funds to income-oriented funds. This finding was based on testimony from husband’s financial expert that wife’s portfolio could be generating about 7 percent instead of the 1.7 percent return it had been generating in growth-oriented funds. Wife argued that any reallocation of the portfolio amounted to an impermissible invasion of her assets. The district court rejected this argument and the majority of the court of appeals agreed because only the income produced by the portfolio would be used to meet wife’s needs and the principal would not be depleted at all.

Judge Kirk disagreed with the majority for a variety of reasons, but was critical of the reallocation conclusion because he saw that as amounting to a requirement that wife deplete the principal of her property award. First, he pointed out that reallocating the portfolio would trigger tax consequences for wife to the tune of about $150,000. The majority was aware of this but held that ignoring the taxes was within the district court’s discretion, citing Maurer v. Maurer, 623 N.W.2d 604, 608 (Minn. 2001), for the proposition that consideration of tax consequences is discretionary. Judge Kirk also argued that reallocating investments forced wife to deplete the principal of the property award because the 7 percent rate of return figure accepted by the district court included capital gains. Finally, Judge Kirk argued that “[c]onversion of one type of investment account into another also changes the nature of the asset, which is analogous to invading the principal or liquidating the investment.” He pointed out that at least one unpublished opinion drew the same analogy: “Just as a court cannot order a spouse to invade her assets to meet her needs… neither can it require [a spouse] to change the nature of these assets in order to produce income to meet her needs.” Schneider v. Nicholls, No. C5-91-832, 1991 WL 245229 (Minn. Ct. App. 11/26/1991).

The Supreme Court began by tracing its earlier decisions holding that district courts must consider the income generated from a property award when adjudicating claims for spousal maintenance. Wife argued that her portfolio of investments differed from those cases since they involved cash and not already-invested assets. She urged the Court to adopt a bright-line rule prohibiting a district court from expecting a spouse to reallocate assets within a property award that had already been invested. The Court reasoned that expecting a property award be invested to produce income was not an invasion of the principal of the award since it did not reduce the value of the underlying assets. And the bright-line rule proposed by wife was inconsistent with the discretion courts have to consider the interplay between property awards and spousal maintenance. The Court then outlined several factors to consider in exercising that discretion: (1) the liquidity of the assets; (2) the spouse’s age and how the asset had been invested during the marriage; and (3) the tax consequences stemming from the reallocation.

Applying these factors, the Court upheld the district court’s determination that wife could reallocate the investments within her portfolio to produce income, but it reversed the district court’s decision to not account for the taxes attributable to the reallocation. Failing to account for the taxes was error because it was undisputed that wife would incur the taxes as part of the reallocation that the district court’s decision effectively required her to undertake. Moreover, wife’s only source of funds to pay the taxes was her property award and so the district court’s decision had the effect of altering the parties’ stipulated property division. The Court remanded the case so that the district court could reconsider its decision to not award spousal maintenance, including the expectation that wife reallocate her investments, with instructions that wife not be required to spend her property award to pay the income taxes resulting from the reallocation. Curtis v. Curtis, ___ N.W.2d ___ (Minn. 2016).

Jaime Driggs
Henson & Efron PA 

 

FEDERAL PRACTICE
JUDICIAL LAW

• CAFA jurisdiction; amount in controversy; timing of removal. The 8th Circuit held that the defendant’s CAFA-based removal was timely when it was filed within 30 days of its receipt of plaintiffs’ expert report, which constituted the “other paper” which quantified the plaintiffs’ damages as an amount greater than $5,000,000, finding that the 30-day removal period under CAFA does not begin to run until a defendant receives a document “from which the defendant can unambiguously ascertain that the CAFA jurisdictional requirements have been satisfied,” and rejecting the plaintiffs’ argument that an earlier demand letter which sought $6,500,000 was sufficient to trigger the removal clock and that the removal was untimely.

A dissent by Judge Murphy asserted that plaintiffs’ demand letter “ambiguously” sought damages in excess of CAFA’s jurisdictional threshold, meaning that the removal was untimely. Gibson v. Clean Harbors Environmental Servs., Inc., ___ F.3d ___ (8th Cir. 2016).

• Recent standing-related decisions. The impact of the Supreme Court’s Spokeo, Inc. v. Robins (136 S. Ct. 1540 (2016)) decision continues to be felt in the District of Minnesota.

In an FDCPA case, Judge Frank rejected the defendant’s challenge to the plaintiff’s standing premised on Spokeo, Inc., finding that the plaintiff had alleged “real harms, and not merely procedural violations.” Hill v. Accounts Receivable Servs., LLC, 2016 WL 6462119 (D. Minn. 10/31/2016).  After converting the defendant’s Fed. R. Civ. P. 12(b)(6) motion to a Rule 12(b)(1) motion, Judge Nelson relied on Spokeo, Inc. in dismissing the plaintiffs’ FCRA claim, finding that the plaintiffs had failed to allege an injury sufficient to confer Article III standing. Shoots v. iQor Holdings US Inc., 2016 WL 6090723 (D. Minn. 10/18/2016).

• Jurisdictional discovery; multiple cases. Judge Frank ordered the parties to engage in limited jurisdictional discovery before ruling on the defendant’s motion to dismiss for lack of personal jurisdiction. Doe 318 v. The Conventual Franciscans a/k/a Conventual Franciscan Friars, 2016 WL 6434084 (D. Minn. 10/28/2016).

In contrast, Judge Doty rejected any need for additional jurisdictional discovery before ruling on one defendant’s motion to dismiss for lack of personal jurisdiction, where the plaintiff had “ample time” for jurisdictional discovery but had “failed to uncover facts sufficient to confer jurisdiction.” Western Nat’l Mut. Ins. Co. v. Daesung Celtic Energy Co., 2016 WL 6471014 (D. Minn. 10/31/2016).

• Motion to stay pending resolution of Fed. R. Civ. P. 23(f) appeal denied. Judge Montgomery denied defendants’ request for a stay pending resolution of their motion for leave to file an interlocutory appeal from the court’s class certification order pursuant to Fed. R. Civ. P. 23(f), finding that the defendants had not established that it was “likely” that they would prevail on appeal, or that they would be irreparably injured if a stay was not granted. In Re Wholesale Grocery Prods. Antitrust Lit., 2016 WL 6246758 (D. Minn. 10/25/2016).

• Action dismissed under SLUSA; incorporation of allegations in subsequent counts. Judge Nelson dismissed the entirety of a putative class action under SLUSA, finding it important that the plaintiffs’ fraud-related allegations were incorporated by reference into their non-fraud-based claims.

If applied to non-SLUSA cases, this incorporation doctrine could have far broader impact in civil litigation if, for example, courts were to determine that the entirety of a complaint violated Fed. R. Civ. P. 11 because the allegations in a single frivolous count were incorporated by reference in the remaining counts of the complaint. Luis v. RBC Capital Markets, LLC, 2016 WL 6022909 (D. Minn. 10/13/2016).

• Motions to intervene, to seal, and to exceed word count granted. In an action challenging a Minnesota school district’s policy permitting transgender students to use facilities based on their gender identity, Judge Wright granted a transgender student’s motion to intervene as a defendant under Fed. R. Civ. P. 24(b) and, while acknowledging the common law right of access to judicial records, also granted her request to file unredacted documents previously filed in support of her motion to intervene under seal. Judge Wright also granted the plaintiffs’ letter request to exceed the word count limitations in the Local Rules. Privacy Matters v. United States Dep’t of Education, 2016 WL 6436658 (D. Minn. 10/27/2016).

• Motion to add class representative granted. Judge Nelson granted plaintiffs’ motion to amend to add a class representative in the NHL concussion litigation despite the related need to modify the scheduling order, finding that the plaintiffs’ counsel had acted diligently in seeking the amendment, and that the NHL would not be prejudiced. In Re National Hockey League Players’ Concussion Lit., 14-CV-2551 (SRN/JSM).

• Failure to identify cases as related. Judge Doty criticized plaintiff’s counsel for filing two “nearly identical” actions on the same day while failing to indicate that the cases were related. Judge Doty noted that he was “troubled” by counsel’s “lack of candor,” and that he “trust[ed]” that neither the plaintiff nor his counsel would repeat their conduct in the future. Jorgensen v. Stewart, Zlimen & Jungers, Ltd., 2016 WL 6080200 (D. Minn. 10/17/2016).

Josh Jacobson
Law Office of Josh Jacobson 

 

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Copyright Act; plaintiffs’ claims dismissed. Chief Judge Tunheim recently granted defendants’ motion to dismiss plaintiffs’ claims of trademark and trade dress infringement based on preemption by the Copyright Act or failure to sufficiently plead. Bruce Munro, an artist known for “large-scale, immersive, light-based works,” sued Lucy Activewear for light displays created in Boston. Munro argued that visitors to the light displays would be confused and believe the works were associated with him. Trademark and trade dress laws are designed to prevent consumer confusion by barring a competitor from misrepresenting its own goods as those of the mark holder. Copyright laws are meant to protect against copying the creativity and originality of another (e. g., an abstract design or creative work). To the extent that Munro’s claims sought to protect the style of the light displays, the court found that the light display was the good itself and not a trademark. Infringement of an artist’s creative style is governed by copyright laws, so the court dismissed the claims as preempted. Munro’s additional state law claims (tortious interference, misappropriation, and unfair competition) also related to infringement of the artist’s creative style, which the court held were also preempted by the federal copyright laws. Munro v. Lucy Activewear, Inc., Civ. No. 16-79 JRT/KMM, 2016 U.S. Dist. LEXIS 135692 (D. Minn. 9/29/2016).

• Trademark; untimely introduction of ab initio theory. Judge Frank recently dismissed a counterclaim for the cancellation of plaintiff’s trademark “SLEEP NUMBER.” After being sued by Select Comfort, defendants counterclaimed for the cancellation of plaintiff’s trademark, arguing that the mark was generic. Defendants argued an abandonment theory—that the mark holder’s actions had caused the mark to become generic by losing its significance in identifying the source (i.e., the producing company) of the product. Such actions, it was alleged, included referring to “SLEEP NUMBER” as a feature of the bed instead of as the producer of the type of bed. Select Comfort moved for summary judgment that the mark was generic under the abandonment theory, which the court denied. Subsequently, and after the close of discovery, defendants withdrew their abandonment theory and put forward a generic ab initio claim, meaning that the mark was generic at the time the company adopted it as a trademark. In dismissing that counterclaim, the court found defendants had only sufficiently pleaded the abandonment theory and had not sufficiently pleaded the ab initio theory to put Select Comfort on notice. The court reasoned that it would have been “manifestly unfair to allow [d]efendants to pursue the ab initio claim at trial” because Select Comfort was not put on notice and discovery had already closed. Thus, the court found the new asserted theory improper and untimely and dismissed defendants’ counterclaim with prejudice. Select Comfort Corp. v. Baxter, et al., Civ. No. 12-2899 DWF/SER 2016 U.S. Dist. LEXIS 147715 (D. Minn. 10/25/2016).

Tony Zeuli & Joe Dubis
Merchant & Gould

 

REAL PROPERTY
JUDICIAL LAW

• Residential lease; security deposit. Tenants occupied a multi-level house pursuant to a written lease. The lease allowed dogs, but prohibited the dogs from entering the basement and second floor of the premises. The tenants admitted that their dogs made it into the prohibited areas several times, but the dogs caused no damage in the prohibited areas. After the tenants moved out of the house, the landlords retained the entire $2500 security deposit and $1000 pet deposit because the dogs were in the prohibited areas. The lease provided that the tenants would forego the security deposit if the dogs were found to be in the prohibited areas. The tenants commenced an action in conciliation court for the return of the security deposit and the conciliation court ruled that the forfeiture clause in the lease was unenforceable pursuant to Minnesota Statutes §504B.178, Subds. 3(b) and 10, and also ruled that the retention of the security deposit constituted bad faith by the landlord under Minnesota Statutes §504B.178, Subd. 7 and awarded the tenants $1,000 in punitive damages.

Landlords appealed to the district court. The district court affirmed the conciliation court’s determination that the forfeiture clause in the lease was unenforceable and that the retention of the security deposit constituted bad faith and affirmed the $1,000 punitive damages award. After a bench trial, the district court did award to the landlords $640 for damages beyond ordinary wear and tear (unrelated to the dog issue), and ordered that the balance of the security deposit be returned. Finally, the district court awarded costs and attorney fees to the tenant pursuant to a provision in the lease that allowed costs and attorney fees to be awarded to the prevailing party “in a lawsuit about the tenancy.” The court of appeals affirmed the district court. An attempt to waive Minnesota Statutes §504B.178 in a lease provision by having the tenant agree to forfeit a security deposit as a remedy for violating a lease provision that does not require a payment of funds to the landlord is void and unenforceable. The court of appeals also affirmed the bad faith finding and affirmed the $1,000 punitive damages award because the statutory amount for punitive damages is $500 for each deposit; and in this case, there was a security deposit and a pet deposit that were unlawfully retained. Despite the fact that the district court awarded $640 for actual damages unrelated to the dog issue, the court of appeals affirmed the attorney fees award because the bulk of the dispute involved the retention of the deposits based on the dogs being present in prohibited areas. Kaeding v. Auleciems, A16-0479, 2016 WL 6463996 (Minn. Ct. App 2016).

• Bankruptcy lien avoidance; judicial liens. The creditor obtained judgment against husband and filed a notice of foreign judgment in a county where husband and wife owned real property as tenants in the entirety. Husband subsequently filed a chapter 7 bankruptcy, listed the property as his homestead exemption, and moved to avoid the judicial lien as an unenforceable lien under 11 U.S.C. §522(f)(1). The bankruptcy court avoided the judicial lien pursuant to 11 U.S.C. §522(f)(1). The Bankruptcy Appellate Panel affirmed the avoidance because the judgment was against husband only and was therefore unenforceable against property owned by tenants in the entirety. The BAP surmised that it was doubtful that the judgment was a lien under Missouri law, but made no findings or ruling on that issue. The 8th Circuit reversed and remanded. The 8th Circuit held that it was unlikely that the judgment lien was a lien under Missouri because the judgment was against only one of the spouses and the title to the property was held by both spouses as tenants in the entirety. The 8th Circuit concluded that when state law does not allow a lien to attach, avoidance under 11 U.S.C. §522(f) is superfluous and without application. Because the bankruptcy court did not make any findings or conclusions on whether the judgment was a lien under state law, the 8th Circuit remanded the issue to the bankruptcy court to decide the matter with the benefit of the adversarial process. In re O’Sullivan, No. 16-1526 (8th Cir. 2016).

Michael Kreun
Beisel & Dunlevy PA

 

TAX
JUDICIAL LAW

• Property tax: Single-member LLC not “individual” for purposes of Green Acres. The Minnesota Supreme Court affirmed the tax court’s determination that Minnesota’s Green Acres statute does not authorize a taxing authority to disregard a single-member limited liability company as an entity separate from its owner. Richard T. Burke, the only member of STRIB IV, used the the LLC solely as a landholding entity to shield himself from personal liability. The LLC held the subject property, and Mr. Burke did not live on the property. Portions of the property were leased for agricultural purposes, but neither Mr. Burke nor members of his family farmed the property. The LLC nonetheless claimed Green Acres treatment; such treatment would have resulted in a lower property tax burden. The Supreme Court, citing the purpose and plain language of the statute, refused to read into the statute permission for the taxing authority to disregard a single-member LLC. “Individual” as used in the statute, the Court determined, has its ordinary meaning as “single natural person.”  The statute’s silence with respect to single-member LLCs does not create an ambiguity, and the Court refused to enlarge the statute’s reach in the face of unambiguous language. The Court also rejected the taxpayer’s argument that since single-member LLCs are generally disregarded for tax purposes, the LLC should be disregarded for Green Acres purposes. Finally, the Court held that the interpretation of the statute did not lead to an absurd result, and the tax court’s decision was affirmed.  STRIB IV, LLC fka Richard T. Burke I, LLC v. Hennepin Co., A16-0423 ___ N.W.2nd ___ (Minn. 11/9/2016).

• Property tax: Valuation supported by the record and within the tax court’s broad discretion. At issue in this property tax dispute was the valuation of the Menard’s home improvement retail store in Moorhead, Minnesota. The tax court adopted valuations (the dispute spanned several tax years) lower than the county’s assessment value but above the taxpayer’s expert appraiser’s valuation. Menard asserted several errors on appeal, including that the tax court erred by rejecting Menard’s expert appraiser’s highest and best use determination; and that the court made improper calculations when it determined the fair market value using the cost approach. Menard also argued that the tax court’s “de facto averaging” of the cost approach and the sales approach was not appropriate, and finally that the lower court failed adequately to explain its reasoning. Clay County also appealed, raising issues surrounding calculations and conclusions of the court’s sales and cost approaches. In a thorough opinion, the Supreme Court affirmed the tax court. The reviewing court determined that each of the tax court’s decisions was supported by evidence in the record, that the lower court properly exercised its discretion, and finally that its decision was explained adequately. Menard, Inc. v. Clay Co., A16-0415 (Minn. 11/9/2016).

• Property tax: Natural-gas pipeline valuation affirmed in part, reversed in part, and remanded. In the underlying case, the tax court found that relator Minnesota Energy Resources Corporation’s (MERC) evidence was sufficient to overcome the presumptive validity of the commissioner’s valuation for four of the five years at issue. For the last year at issue, the tax court found that the market value of MERC’s property was higher than the commissioner’s valuation.

Both parties appealed the judgment. MERC challenged four aspects of the tax court’s decision: its failure to adopt a company-specific risk factor; its rejection of the build-up method; its lack of explanation of the beta factor it applied; and its adoption of the Eurofresh standard for proving external obsolescence. The commissioner challenged two grounds of the tax court decision: the deductions made by the tax court for intangible assets and working capital and the tax court’s rejection of the market approach without at least considering the sales price paid by Integrys (of which MERC is a wholly owned subsidiary) in 2006. The Supreme Court found that the evidence supported the tax court’s decision not to include an additional company-specific risk factor in its cost of equity. The Supreme Court held that the tax court erred when it failed to explain its weighing of the beta factors and when it applied the Eurofresh standard for external obsolescence and reversed and remanded on those issues. Finally, the Supreme Court found that the tax court did not clearly err on the remaining four grounds of appeal.

The tax court’s decision to exclude a company-specific risk factor was a factual determination, based on conflicting testimony by experts, rather than a legal conclusion. As a result, the Supreme Court reviewed it for clear error. The Supreme Court determined that it could not say the tax court erred on the company-specific risk factor, as the tax court was in the best position to weigh conflicting opinions by the parties’ experts. The Supreme Court concluded that the tax court did not clearly err when it declined to use the build-up method in its cost of equity calculation on similar grounds.

Beta factors are used within corporate finance to compare the “relative volatility of a specific investment compared to the volatility of the market as a whole.” (Minn. Energy Res. Corp. at 12.) While the tax court’s beta factor could be isolated within the cost of equity formula, the tax court failed to provide an explanation of how it selected the specific value. As a result, the Supreme Court reversed and remanded on this issue for further explanation.

The tax court adopted a standard of external obsolescence from Eurofresh, Inc. v. Graham County., 187 P.3d 530 (Ariz. Ct. App. 2007) that requires the taxpayer to offer probative evidence that the obsolescence actually affects the subject property. This standard has been used previously in at least two other cases since 2009. The Supreme Court declined to adopt the Eurofresh standard on the following grounds: The Supreme Court has never required use of the heightened standard and the fact that a taxpayer cannot identify and quantify specific factors does not mean that the property does not suffer from external obsolescence. On remand, the tax court will need to evaluate MERC’s evidence of external obsolescence without using the Eurofresh standard.

The commissioner’s first argument on cross-appeal concerned the taxability of intangible property and working capital under Minnesota law. The tax court used Northwest Airlines to support its decision to deviate from the commissioner’s valuation formula. The Supreme Court found that reasoning to be incorrect, but held that the administrative rules grant the tax court the authority to deviate from that formula to ensure that all relevant data pertaining to valuation was considered.

Finally, the commissioner’s second argument concerned the tax court declining to use evidence of the 2006 sale of MERC into its calculation for the market value. The Supreme Court rejected the commissioner’s argument for the following reasons: The MERC sale included the overall value of the enterprise, rather than just the pipeline distribution system; there are no administrative rules or statutes that require the tax court to consider this evidence; and the experts did not rely on the market approach or MERC’s 2006 sale. Minn. Energy Res. Corp. v. Comm’r, A15-0422 and A15-0438 (Minn. 11/9/2016).

• Self-represented litigants held to same standard as other litigants. In correspondence, the commissioner notified F&G Beauty that an order for unpaid sales and use tax would be forthcoming. Prior to issuance of an order or decision, F&G appealed the correspondence to the tax court. Despite warnings from the commissioner that the correspondence was not an appealable order, F&G Beauty continued its attempted appeal of the order, stating that it did not trust the commissioner or her staff. Because the correspondence was not an order or decision, the tax court granted the commissioner’s motion to dismiss due to lack of subject matter jurisdiction. F&G Beauty Supply v. Comm’r, 2016 WL 6583849 (Minn. T.C. 10/26/2016).

• Commissioner’s prima facie validity does not include substantive deference to commissioner’s discretionary appraisal judgments. In a dispute surrounding a proposed utility assessment, the tax court concluded that the commissioner willfully failed to disclose the Eyre Draft (the Commissioner’s appraiser’s draft) to CenterPoint. The tax court found that the interests of justice required acceptance of the draft into the summary judgment record as sufficient evidence that created a genuine issue of material fact to rebut the prima facie validity of the commissioner’s valuation.

In response, the commissioner argued that her statutorily granted prima facie validity entitles her to summary judgment. The court rejected her argument. First, the court pointed out that a prima facie case merely results in a shift of the evidentiary burden to the nonmoving party. CenterPoint at *8. The nonmoving party must present substantial evidence that permits a reasonable person to draw different conclusions regarding a material fact. By providing this evidence, the nonmoving party both “defeats the prima facie validity and forecloses summary judgment.” Minnesota case law has established that market value—the point at issue in the commissioner’s order—is a question of fact. See e.g. SMBSC, 737 N.W.2d at 558. The tax court rejected the commissioner’s proposed interpretation of Rule 8100, concluding that “we will not allow the commissioner to use as a bludgeon to crush all challenges, a shield only meant to protect her utility assessments only from insubstantial ones.” Thus, CenterPoint’s fee appraisal conducted by Mr. Tegarden was substantial evidence that overcame the commissioner’s prima facie validity and defeated her motion for summary judgment. CenterPoint Energy Res. Corp. v. Comm’r, 2016 WL 6068337 (Minn. T.C. 10/14/2016).

LOOKING AHEAD

• State tax election developments. Several of Minnesota’s sister states had interesting tax issues on the November ballot. For example, voters rejected new taxes in Washington state (rejected a tax on carbon) and Colorado (rejecting an income tax increase for universal health care). Voters in some states and cities, however, approved new or increased taxes: California, for example, approved a high-earner income tax extension, and soda, tobacco, and sales tax increases dedicated to mass-transit were enacted in some cities. One thing that voters seemed to agree on: legalization and taxation of marijuana. It was approved in every state in which it was on the ballot. Interested readers can find a thorough listing of state tax initiatives and outcomes at the Tax Foundation website, www.taxfoundation.org.

Morgan Holcomb
Mitchell Hamline School of Law

Jessica Dahlberg
Grant Thornton

 

TORTS & INSURANCE
JUDICIAL LAW

• Underinsured motorist; statute of limitations and ripeness. In April 2012, plaintiff suffered injuries in a motor vehicle accident that took place in Iowa. After plaintiff’s former counsel failed to sue the tortfeasor within Iowa’s two-year statute of limitations, he filed a malpractice suit. Plaintiff and his prior counsel agreed to settle that claim, and provided plaintiff’s insurer with a Schmidt-Clothier notice. Plaintiff also filed suit against his insurer seeking underinsured motorist benefits. The district court granted the insurer’s motion to dismiss for failure to state a claim upon which relief can be granted.

The Minnesota Court of Appeals affirmed. The court held that a condition precedent to a claim for underinsured motorist benefits is recovery from the tortfeasor, either through a judgment in excess of policy limits or settlement. Here, the statute of limitations precluded plaintiff from recovering from the tortfeasor. Because plaintiff could not recover from the tortfeasor—a condition precedent to a claim for underinsured motorist benefits—dismissal of his complaint was proper. Ronning v. State Farm Mut. Auto. Ins. Co., No. A16-0538 (Minn. Ct. App. 11/7/2016). http://mn.gov/law-library-stat/archive/ctappub/2016/opa160538-110716.pdf

Jeff Mulder
Bassford Remele

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