• Debtor qualification for a repayment program payment of $0.00 does not constitute an ability to pay as a matter of law. Debtor sought to discharge student loan debt which totaled in excess of $27,000 as an “undue hardship” under 11 U.S.C. §523(a)(8). The U.S. Department of Education appealed the decision of the bankruptcy court, which held that her student loan debts were dischargeable. The BAP noted that the 8th Circuit did not follow the majority of circuits, which apply the test set forth by the 2nd Circuit in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2nd Cir. 1987), but rather “follows a more flexible approach under a totality of circumstances test.” The BAP observed that debtor had three minor children, income which had never exceeded $25,000 annually, no savings, and received food stamps and rental assistance. Debtor had not received gainful employment from the education obtained from the student loan proceeds. The Department of Education stated that debtor qualified for at least two repayment plans, relying on Educ. Credit Mgmt. Corp. v. Jesperson, 571 F.3d 775 (8th Cir. 2009). The BAP noted that availability of repayment options is a relevant fact, but could not be the sole basis to analyze undue hardship. The BAP distinguished Jesperson, noting the debtor in that case was an attorney who could afford a monthly payment of $629. In the present case, the debtor had never been required to make any payments. The BAP held that “[w]e do not interpret Jesperson to stand for the proposition that a monthly payment obligation in the amount of zero automatically constitutes an ability to pay.” In re: Sara J. Fern, No. 16-6021 (8th Cir. BAP 2/7/2017) (N.D. Iowa).
• Under Section 522(o), the objecting party needs to show increase in value of homestead due to improvements, not the amount of non-exempt assets used to pay for improvements. Trustee objected to debtors’ claimed homestead exemption, arguing for a reduction of the exemption under 11 U.S.C. §522(o) in the amount of certain nonexempt property which trustee asserted debtors transferred to their homestead with the intent to hinder, delay, or defraud their creditors. The bankruptcy court sustained the trustee’s objection and reduced the debtors’ homestead exemption by $74,249.68, which constituted the costs of the improvements made to the homestead. The BAP reversed, holding that an objecting party needed to show the value of the homestead which is attributable to non-exempt assets. The BAP focused on the specific text of Section 522(o), that the reduction is calculated “to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period.” The BAP held that when a debtor fraudulently converts non-exempt assets to make improvements, the court must compare the difference in the value of the debtor’s interest in the homestead with and without the improvements. The court stated that the amount the debtor actually spent on the improvements is relevant only to extent an appraiser analyzes them in valuation. The BAP remanded the case to determine the extent to which the improvements increased the value of the debtors’ interest in their homestead. In re Crabtree, No. 16-6028 (8th Cir. BAP 1/24/2017) (D. Minn.).
DeWitt Mackall Crounse & Moore S.C.
• Trespass: Trespass requires command to leave property and command not to return to property. Appellant and his wife co-owned a horse when they separated, which was boarded on S.S.’s property. Appellant took the horse from S.S.’s property back to his farm. Appellant’s wife and S.S. went to appellant’s farm to retrieve the horse and argued with appellant. S.S. told appellant never to return to her property. A few days later, another of S.S.’s boarding clients saw appellant drive into S.S.’s driveway. S.S. called the police, who mailed appellant a citation for trespassing. Appellant was convicted of trespassing after a jury trial. On appeal, appellant argues there was insufficient evidence to prove that S.S. told appellant to leave her property.
Held, the plain meaning of the trespassing statute requires proof that appellant had been told both to leave the property and not to return, but there is no evidence here to prove appellant was told to leave the property. The statute criminalizes “return[ing] to the property of another… after being told to leave the property and not to return.” The use of “and” ordinarily has a conjunctive meaning, and such a reading ensures clarity and notice of exactly what behavior is prohibited. Appellant’s conviction is reversed. State v. Ronald Gene Kremmin, Ct. App. 1/3/2017.
• Criminal procedure: Jury sequestration is procedural matter controlled by rules of criminal procedure. At the close of evidence during his trial for terroristic threats and possession of a firearm by an ineligible person, appellant requested that the jury be sequestered over the weekend, which fell during the jury’s deliberations. The district court declined to do so under Minn. R. Crim. P. 26.03, subd. 5(1), which allows the court to deny a sequestration motion without the defendant’s consent. After his conviction on both counts, appellant appealed, arguing that the jury should have been sequestered pursuant to Minn. Stat. §631.09, which requires the sequestration of deliberating jurors.
Procedural matters are the Minnesota Supreme Court’s responsibility, pursuant to its inherent power, while the Legislature determines matters of substantive law. Jury sequestration is a procedural matter, because it does not relate to “defining crimes or prescribing punishments, nor does it deprive a defendant of any defense on the merits or create a new cause of action.” Where a court rule and a statute conflict regarding a procedural matter, the court rule takes precedence. The district court did not abuse its discretion in denying appellant’s sequestration motion under Rule 26.03, subd. 5. State v. Lionel Curtis Drew, Ct. App. 1/3/2017.
• Criminal procedure: District court may not restrain a non-party without an authorizing rule or statute. Respondent was charged with second-degree assault with a deadly weapon. At his first appearance, the district court granted respondent’s motion challenging the constitutionality of the DNA collection statute, Minn. Stat. §299C.105, and issued an order restraining the Dakota County Sheriff from collecting respondent’s DNA. Upon the sheriff’s petition for writ of prohibition, the court of appeals found the district court had subject matter jurisdiction and did not err in granting respondent’s motion. The Minnesota Supreme Court granted the sheriff’s petition for review.
A writ of prohibition is appropriate only where (1) an inferior court or tribunal is about to exercise judicial or quasi-judicial power, (2) the exercise of such power is unauthorized by law, and (3) the exercise of such power will result in injury for which there is no adequate remedy. The district court exercised judicial power in issuing its order. That exercise of power was unauthorized by law, because the district court used the wrong procedure to address respondent’s constitutional challenge to the DNA collection statute. The district court, as a court of general jurisdiction, had subject matter jurisdiction over respondent’s motion, but the rules of criminal procedure do not authorize respondent’s motion. Rule 5 governs first appearances and does not provide for motions challenging a statute’s constitutionality. Rule 11 does authorize such motions, but not at a first appearance. There is no rule of criminal procedure that authorizes his motion or the district court’s order restraining a third party from taking the action to which respondent objected. The court notes that a civil action would have been the appropriate course for respondent to challenge the statute.
Finally, the court finds that the sheriff did suffer an injury for which there is no adequate remedy. He is not a party to the criminal case and cannot, therefore, assert his interests on the constitutional question raised by respondent. He received no notice or opportunity to be heard. The sheriff has no adequate remedy, as he has no other way to contest the district court’s order and no other way to collect respondent’s DNA. The court of appeals is reversed and the sheriff’s petition for a writ of prohibition is granted. In re Timothy Leslie v. Emerson, Sup. Ct. 1/11/2017.
• Criminal sexual conduct: Stepgrandfather-stepgranddaughter relationship is a “significant relationship.” Appellant appeals his second-degree criminal sexual conduct convictions, arguing that the district court erred when it found that Minn. Stat. §609.341, subd. 15’s definition of “significant relationship” includes a stepgrandfather-stepgranddaughter relationship. The statute states that a significant relationship exists when the actor is “any of the following persons related to the complainant by blood, marriage, or adoption: brother, sister, stepbrother, stepsister, first cousin, aunt, uncle, nephew, niece, grandparent, great-grandparent, great-uncle, or great-aunt.”
The court of appeals finds that the statute is ambiguous and examines the legislative intent, noting that the statute’s overall objective and purpose is to prohibit intra-family sexual contacts. The court concludes it would be absurd and contrary to this purpose to exclude stepgrandfathers from the definition of “significant relationship.” State v. Edwin Gochingco Reyes, Ct. App. 1/9/2017.
• Restitution: Identity theft minimum restitution requirement not a violation of due process. Appellant pleaded guilty to identity theft and was ordered to pay $1,000 to each direct victim, under Minn. Stat. §609.527, subd. 4’s minimum-restitution provision. Appellant argues that this provision violates his substantive and procedural due process rights.
While the district court generally has broad discretion to order restitution, Minn. Stat. §609.527, subd. 4, states that the district court “shall order” $1,000 to each direct victim of identity theft. First, the court of appeals concludes that the minimum-restitution provision does not violate substantive due process. The provision does not implicate a fundamental right, so the court applies the rational basis test, finding that it is rationally related to the state’s legitimate interest in compensating victims of crimes.
Next, the court also finds that appellant’s procedural due process rights were not violated. The minimum-restitution provision may implicate appellant’s property rights, but he was given sufficient notice and opportunity to be heard. The record at sentencing establishes that restitution would be based on the harm caused to the direct victims of his crimes. Appellant was able to, and did, request a restitution hearing to address and challenge the restitution order, but he voluntarily waived that hearing. The district court’s restitution order is affirmed. State v. Emile Rey, Ct. App. 1/9/2017.
• Restitution: Restitution hearing is critical stage at which defendant has right to be present. Appellant pleaded guilty to fleeing a peace office in a motor vehicle, and restitution was ordered to reimburse the sheriff’s office for damage to a squad car. A contested restitution hearing was scheduled and notice was given to appellant’s attorney. Appellant’s attorney attended the hearing, but appellant was incarcerated and did not attend. The district court found that appellant had ample notice and waived his appearance, because he could have either requested a continuance or made arrangements to appear. After the hearing, the court ordered nearly the same amount of restitution.
Held, a criminal defendant has a constitutional right to be present at a restitution hearing. The court of appeals has previously concluded that a restitution hearing is a critical stage in a criminal proceeding, guaranteeing a criminal defendant the right to counsel. It is also well settled that a criminal defendant has a 6th Amendment “right to be present at all stages of the trial where his absence might frustrate the fairness of the proceedings,” and a 14th Amendment right to be present at all critical stages of trial. Minn. R. Crim. P. 26.03, subd. 1(1)(h), also requires a defendant’s presences at every stage of trial, including sentencing.
Appellant’s incarceration was ample justification for not being present at the restitution hearing. The district court presumed appellant waived his right to a hearing, but the record is not clear as to whether appellant actually received notice of the hearing. The district court erred in determining appellant waived his right to a hearing, because it did not adequately ensure appellant’s waiver to be present at the hearing was voluntary. The state failed to prove that this error was harmless beyond a reasonable doubt, so the case is reversed and remanded for a new restitution hearing. State v. Joel Patrick Rodriguez, Ct. App. 1/9/2017.
• 5th Amendment: Order compelling defendant to provide fingerprint to unlock cellphone not a 5th Amendment violation. Appellant was charged with burglary, theft, and property damage. His cell phone was seized pursuant to a warrant. An additional warrant was obtained to search the phone, but the police were unable to unlock the phone. The district court ordered appellant to provide his fingerprint to unlock it, but appellant refused. After being found in civil contempt, appellant provided his fingerprint. Appellant was convicted after a jury trial.
In this case of first impression, the court of appeals holds that the district court’s order did not violate respondent’s 5th Amendment privilege, because it did not require a testimonial communication. To be testimonial, a communication must itself relate a factual assertion or disclose information. Appellant was compelled by the district court’s order, and incriminating evidence was found on his cell phone once it was unlocked. However, appellant was not required to disclose any information or speak his guilt by providing his fingerprint. Providing his fingerprint was no more testimonial than furnishing a blood sample, providing handwriting or voice exemplars, standing in a lineup, or wearing particular clothing, all of which the courts have found to be nontestimonial. State v. Matthew Vaughn Diamond, Ct. App. 1/17/2017.
• 5th Amendment: No 5th Amendment violation to request DNA sample after invocation of right to remain silent. During the execution of a search warrant at a residence, appellant was detained and handcuffed, but was told he was not under arrest. He gave officers his name and date of birth, and indicated he came from the southwest bedroom. Appellant was brought to a squad car and Mirandized. Appellant invoked his right to remain silent and was escorted back to the residence. A shotgun was found during the search in the southwest bedroom, and appellant was arrested after police determined he was prohibited from possessing firearms. At the jail appellant was asked to submit to a DNA swab, but was not re-Mirandized. Appellant consented and volunteered that he had touched the firearm. His DNA was found on the shotgun. He was subsequently convicted of possession of a short-barreled shotgun and being a prohibited person in possession of a firearm.
The court of appeals first finds that appellant was neither in custody nor subject to interrogation when he identified his bedroom to police. Appellant was handcuffed at the time, but was told he was not under arrest. The officers had put their firearms away and were in the process of executing a search warrant, during which they needed to control the movements of the occupants of the residence and assess any danger. The questions asked of appellant at that time merely amounted to “on-the-scene questioning” intended “to get a preliminary explanation of a confusing situation,” which does not amount to interrogation.
Appellant was also not interrogated when asked for his consent to collect a DNA sample, because the officers could not have reasonably expected the request for a DNA sample to elicit the incriminating response that appellant had touched the firearm. “A request for a DNA sample is merely an attempt to obtain consent for a physical test and does not call for any response other than yes or no,” and “is the type of question normally attendant to arrest and custody.” Affirmed. State v. Erik John Heinonen, Ct. App. 1/30/2017.
• Jury instructions: Modification of eyewitness identification instruction not required where not supported by the evidence. Appellant and another male approached J.S. on the street. Appellant pointed a gun at J.S., told him to empty his pockets, and frisked him. J.S. later described appellant to police. When apprehended by police, appellant was shown to J.S., who identified him as the man with the gun. Prior to trial, appellant moved to have the jury instructed to consider “whether the witness and defendant’s difference of race affected the accuracy of [J.S.]’s identification” of appellant. J.S. testified at trial as to his certainty that appellant was the assailant and his identification of appellant. Appellant was convicted of being a felon in possession of a firearm and first-degree aggravated robbery.
Appellant sought to add language to CRIMJIG 3.19, the cautionary instruction on eyewitness identification. The Minnesota Supreme Court previously considered the issue of cross-racial witness identification in the context of expert testimony and upheld the exclusion of such testimony as a decision within the district court’s discretion. And unlike other states in which instructions regarding racial disparity have been adopted following intensive scientific studies mandated by the state’s supreme courts, Minnesota has no such body of evidence on which to rely.
Appellant did not offer expert witness testimony on cross-racial identification, so the district court had no basis for instructing the jury on the issue. Appellant also did not cite any evidence indicating that he had been misidentified based on cross-racial differences to support a “theory of the case” instruction on cross-racial identification. The district court did not err in refusing to instruct the jury as Appellant requested. State v. Justin Dillard Thomas, Ct. App. 1/17/2017.
• Plea: Proper for district court to inquire about and monitor plea negotiations. In her appeal from the summary denial of her petition for postconviction relief, appellant argues that she should be permitted to withdraw her plea because the district court improperly inserted itself into plea negotiations. Appellant pleaded guilty to aiding and abetting second-degree unintentional murder arising from the death of E.S., which was witnessed by appellant’s children. Prior to her plea, the district court encouraged the parties to attempt to resolve the case, commenting on the “serious situation” of having appellant’s children testify against their mother. Later, before trial, the state updated the court via e-mail regarding the status of the plea negotiations. The court replied that it would not be willing to accept the defendant’s offer of second-degree manslaughter, and thought the state’s offer of second-degree unintentional murder was more appropriate. Once trial commenced, the court inquired about the negotiations. After the first two days of trial, appellant entered a guilty plea to aiding and abetting second-degree unintentional murder.
At sentencing, appellant’s attorney stated that the court told the parties it would sentence appellant in the “middle of the box.” In an affidavit submitted to the postconviction court, appellant’s trial attorney stated that, upon the judge’s law clerk’s suggestion during an off-the-record conversation that the judge propose a lesser offense to facilitate the plea negotiations, the judge presented to the state the possibility of amending the charge to second-degree unintentional murder. The state’s trial attorneys denied recalling any such suggestion by the court.
It is reversible error for a district court to accept a guilty plea that results from the district court’s impermissible participation in plea negotiations, which includes direct involvement in the negotiations, its imposition of a plea agreement, or its promise to impose a particular sentence. Here, however, the district court did not make an unequivocal sentencing promise. Appellant’s attorney’s statement at sentencing regarding the district court’s “middle of the box” agreement is not supported by any evidence. The district court also did not make a direct plea offer. The second-degree unintentional murder offer was made by the state nine days before trial began. The district court merely inquired into the status of and monitored ongoing plea negotiations, which is not an impermissible involvement with the plea negotiation process.
The court of appeals considers whether, in the aggregate, the district court’s comments encouraging settlement are sufficient to invalidate appellant’s plea. Here, however, the court determines that the district court’s comments and inquiries were merely the district court monitoring the plea negotiations. Affirmed. Jetaun Helen Wheeler v. State, Ct. App. 1/23/2017.
• Criminal vehicular operation: Passenger’s manipulation of steering wheel of moving vehicle constitutes “operation.” Appellant was drinking at a bar, after which B.H. drove appellant and others to appellant’s friend’s house. Appellant sat in the front passenger seat and began to argue with B.H. about directions. At one point, appellant told B.H. she had missed a turn and took the steering wheel, yanking it toward himself. B.H. lost control of the vehicle and it crashed. Appellant was charged with CVO.
The court of appeals examines the CVO statute, Minn. Stat. §609.21, to determine whether the state presented sufficient evidence to prove that appellant operated the motor vehicle. “Operation” is not defined in section 609.21. The CRIMJIGs define “operation” only with respect to DWI, not CVO, which are “significantly different” types of offenses. The court concludes that “the manipulation of the steering wheel of a moving motor vehicle by a passenger constitutes ‘operation’ of a motor vehicle under Minn. Stat. § 609.21.” There was sufficient evidence here for the district court to conclude beyond a reasonable doubt that appellant manipulated the moving vehicle’s steering wheel. State v. Tchad Tu Henderson, Ct. App. 1/30/2017.
EMPLOYMENT & LABOR
• Insurance; no coverage for injured employee. A company was not entitled to insurance coverage for its $1.5 million damage award to an injured employee. The 8th Circuit Court of Appeals held that the claim was barred because the company did not timely notify the insurer and the injury occurred while the employee was on a break at work. American Railcar Indus., v. Harford Ins. Co., 2017 Minn. App. LEXIS 2147 (Minn. App. 2/7/2017) (unpublished).
• Workers compensation; denial upheld. Reversing the Workers Compensation Court of Appeals (WCCA), the Supreme Court denied coverage for emotional and marital distress alleged by a worker’s compensation claimant. The Court agreed with the compensation judge’s determination that the employee did not suffer a compensable concussion and past concussion syndrome based upon the opinion of an adverse psychologist. Gianotti v. Ind. Sch. Dist. 152¸ 2017 Minn. App. LEXIS 53 (Minn. App. 2/8/2017) (unpublished).
• Health insurance; ERISA presentation. The Federal Employees Income & Retirement Security Act (ERISA) nullifies a state regulatory law concerning prescription drug benefits in health insurance plans for employees. The 8th Circuit Court of Appeals held that the law is barred by the broad pre-emption clause under the federal law. Pharm. Care Mgmt. Ass’n., v. Gerhart, 2017 Minn. App. LEXIS 476 (Minn. App. 1/11/2017) (unpublished).
• Disability discrimination; ADA claim survives. A claim for compensatory damages under the Americans with Disabilities Act (ADA) survived the death of the claimant. The 8th Circuit ruled that the case could continue after the employee in a wrongful discharge case died. Guenther v. Griffin Const. Co. 2017 Minn. App. LEXIS 943 (Minn. App. 1/19/2017) (unpublished).
• Race discrimination; failure to raise claims. A volunteer intern at a St. Paul hospital was barred from asserting a race discrimination claim on appeal because he failed to raise it in district court. The Minnesota Court of Appeals also held that a related reprisal claim lacked merit. Randall v. Healtheast/St. John’s Hospital, 2017 Minn. App. LEXIS 48 (Minn. App. 1/17/ 2017) (unpublished).
• Unemployment compensation; not actively seeking employment. An applicant for unemployment compensation was not entitled to benefits because he was not actively seeking “suitable employment,” as required by Minn. Sat. §268.085, subd. 1(5). The court of appeals noted that the claimant limited his job search due to his medical condition and applied for only four jobs in a six-month period. Carter v. Dep’t. of Emp’t. & Econ. Dev., 2017 Minn. App. LEXIS 69 (Minn. App. 1/17/2017) (unpublished).
• Race discrimination; insubordination grounds for termination. An African-American municipal employee with the street department lost his claim of race and age discrimination after he was fired from a position with the city on grounds that he failed to substantiate a discrimination claim with sufficient probative evidence. The 8th Circuit Court of Appeals held that the city improperly cited insubordination as the reason for firing him. Grant v. City of Blytheville, 2016 Minn. App. LEXIS 23261 (Minn. App. 12/23/2016) (unpublished).
• Unemployment compensation; long delay bars benefits. An employee who claimed that she quit her job because of harassment was not entitled to unemployment compensation benefits because she waited nearly eight months after the last incident of harassment before she quit, and the conditions that she objected to were corrected by the employer. The court of appeals ruled that the employee voluntarily chose to quit her job and did not have a good reason to do so, which warranted upholding a ULJ’s determination of ineligibility for benefits. Dowls v. Select Comfort Retail Corp., 2016 Minn. App. LEXIS 1045 (Minn. App. 11/28/2016) (unpublished).
• Retaliation; state law whistleblower claim rejected. A hospital employee lost a claim for a whistleblower claim for retaliation under the Minnesota whistleblower law, because her communications were intended to protect her from potential liability, she was unhappy with her supervisor, and she vented about her dissatisfaction with a change in schedule, but did not report any activity. The court of appeals held that the activities engaged in by the claimant did not establish a prima facie case for protection under the Minnesota Whistleblower statute, Minn. Stat. §181.932. Childs v. Fairview Health Servs., 2016 Minn. App. LEXIS 1043 (Minn. App. 11/28/2016) (unpublished).
• Unemployment compensation; employees’ claim upheld. A group of construction workers were employees, entitled to coverage under the Minnesota Unemployment Compensation Law, rather than independent contractors. The appellate court held that the determination by an Unemployment Law Judge (ULJ) that the invoices submitted by the employees did not warrant treating them as independent contractors for purposes of ineligibility for unemployment compensation benefits. A-1 Construction, Inc., v. DEED, 2016 Minn. App. LEXIS 1016 (Minn. App. 11/14/2016) (unpublished).
• Unemployment compensation; settlement agreement defers benefits. An employee was temporarily denied eligibility for unemployment compensation benefits because she received a payment in connection with a settlement agreement. The court of appeals upheld a determination of ineligibility by a ULJ on grounds that the payment made to the employer was subject to income tax withholding, which deferred entitlement to unemployment compensation benefits until the payment was exhausted. Campbell v. MVP Realty Advisors, LLC, 2016 Minn. App. LEXIS 1071 (Minn. App. 12/5/2016) (unpublished).
n Unemployment compensation; shift change does not warrant unemployment benefits. An employee who quit his job rather than agreeing a change in his work shift and then failed to show up for work was ineligible for unemployment compensation benefits. The appellate court ruled that the employee committed “misconduct,” making him ineligible for benefits. Wolde v. Minnesota Dept. of Veterans Affairs, 2016 Minn. App. LEXIS 1121 (Minn. App. 12/19/2016) (unpublished).
• Unemployment compensation; no voluntary leave. A denial of benefits on grounds that the employee voluntarily took a leave of absence was set aside and remedied. The court of appeals held that the company’s internal documentation reflected that the employee either quit or was fired. Browne v. M.A. Mortenson, Inc., 2017 Minn. App. LEXIS 75 (Minn. App. 11/23/2017) (unpublished).
• Unemployment compensation; refusal to text. An employee at a chemical dependency center was denied unemployment benefits after she refused to submit to a chemical dependency test. The court of appeals ruled that the employee’s refusal, after a co-worker suspected her of marijuana use, constituted disqualifying “misconduct.” Fulmer v. Median Behavioral Health, LLC, 2017 Minn. App. LEXIS 130 (Minn. App. 02/06/2017) (unpublished).
A proposal to lift the 70-year-old mandatory retirement age for state court judges has been introduced in the Legislature. The measure was presented for the second time by Rep. Tina Liebling (DFL-Rochester) seeking to repeal the existing law, Minn. Stat. §490.125, that requires judges to retire at the end of the month they reach the age of 70. It has been invoked three time in the past four years for Supreme Court Justices Paul Anderson, Alan Page, and Christopher Dietzen.
Hellmuth & Johnson, PLLC
• Certiorari granted; personal jurisdiction. The Supreme Court has granted certiorari in two cases which raise issues relating to personal jurisdiction.
The first case asks whether a plaintiff’s claims can “arise out of or relate to” a defendant’s forum activities when there is no causal link between the defendant’s forum contacts and the plaintiff’s claims. Bristol-Myers Squibb Co. v. Superior Court, 377 P.3d 874 (Cal. 2016), cert. granted, ___ S. Ct. ___ (2017).
The second case asks whether a state court may decline to follow the Supreme Court’s decision in Daimler AG v. Bauman in a FELA action. BNSF Rwy. Co. v. Tyrrell, 373 P.3d 1 (Mont. 2016), cert. granted, ___ S. Ct. ___ (2017).
• Certiorari granted; Article III standing; intervention. The Supreme Court has granted certiorari in a case that asks whether intervenors as of right under Fed. R. Civ. P. 24(a) must have Article III standing. A majority of circuit courts have held that Article III standing is not required. The 8th Circuit is one of three circuits to require intervenors to establish Article III standing, and has acknowledged the circuit split. Laroe Estates, Inc. v. Town of Chester, 828 F.3d 60 (2d Cir. 2016), cert. granted, ___ S. Ct. ___ (2017). Current 8th Circuit law: United States v. Metropolitan St. Louis Sewer Dist., 569 F.3d 829 (8th Cir. 2009).
• Fed. R. App. P. 7; amount of appeal bond; class action administration costs. Reversing Judge Magnuson, the 8th Circuit held that under Fed. R. App. P. 7, an appeal bond may not include costs associated with delays in administering a class action settlement. In Re: Target Corp. Customer Data Sec. Breach Lit., ___ F.3d ___ (8th Cir. 2017).
• Ruling by 8th Circuit administrative panel; law of the case. Rejecting a renewed challenge to its subject matter jurisdiction, the 8th Circuit held that an administrative panel’s previous denial of a motion to dismiss was the law of the case, to be followed in “the absence of clear error or manifest injustice.” Williams v. Employers Mut. Cas. Co., 845 F.3d 891 (8th Cir. 2017).
• Challenge to award of attorney’s fees in class action rejected. Rejecting a challenge to an award of attorney’s fees to class counsel and affirming Judge Ericksen, the 8th Circuit found that Judge Ericksen’s “analysis was thorough,” her findings were “amply supported,” and that she had not abused her “significant discretion” by utilizing the “percentage-of-the-benefit method” and awarding class counsel $2.8 million in fees and expenses. In Re: Life Time Fitness, Inc. TCPA Lit., ___ F.3d ___ (8th Cir. 2017).
• Denial of sanctions affirmed. The 8th Circuit affirmed a district court order that denied the defendant’s motion for sanctions under Fed. R. Civ. 16(f) and 37(c), rejecting the defendant’s argument that the plaintiff was improperly permitted to change its damages calculations on the eve of trial. Acciona Windpower N. Am., LLC v. City of West Branch, ___ F.3d ___ (8th Cir. 2017).
• Appeal by class action objector dismissed for lack of standing. The 8th Circuit dismissed an appeal by an objector to a class action settlement, finding that the objector lacked Article III standing because she was not a member of the sub-class on whose behalf she purported to object. Huer v. Van de Voorde, ___ F.3d ___ (8th Cir. 2017).
• 28 U.S.C. §1367; federal claims stayed; state law claims proceed. Judge Nelson took the fairly unusual step of staying the plaintiff’s federal claim pending a potentially dispositive decision by the United States Supreme Court, but also denied the defendants’ request to stay the plaintiff’s supplemental state law claims, and ordered that the state law claims proceed to a motion for summary judgment, and possibly trial. Rumble v. Fairview Health Services, 2017 WL 401940 (D. Minn. 1/30/2017).
• Summary judgment motion granted; double hearsay excluded. Judge Nelson granted one defendant’s motion for summary judgment in a patent infringement action, finding that certain evidence submitted by the plaintiff in opposition to the motion was “inadmissible double hearsay.” Luminara Worldwide, LLC v. Liown Elecs. Co., 2017 WL 489409 (D. Minn. 2/6/2017).
• Class certification denied where individual issues predominated. Judge Kyle denied the plaintiff’s motion for class certification in a putative TCPA class action, finding that multiple issues were unique to individual class members, making the matter inappropriate for class certification. Ung v. Universal Acceptance Corp., ___ F.R.D. ___ (D. Minn. 2017).
• Fed. R. Civ. P. 12(b)(1); failure to assert any basis for court’s jurisdiction. Judge Frank dismissed an action without prejudice where the plaintiffs’ complaint failed to assert any basis for the court’s jurisdiction. Schwab v. Colvin, 2017 WL 401939 (D. Minn. 1/30/2017).
• Fed. R. Civ. P. 55(b); default judgment vacated; “sum certain.” Judge Wright vacated a default judgment entered by the clerk pursuant to Fed. R. Civ. P. 55(b)(1), finding that the plaintiff could not establish that it was entitled to a “sum certain,” and that the defendants had a “mitigating reason”—health—for their delay in answering the complaint. AGCO Finance, LLC v. Littrell, ___ F. Supp. 3d ___ (D. Minn. 2017).
• Attempt to amend complaint in memorandum rejected. Granting the defendants’ motion to dismiss, Judge Magnuson rejected the plaintiff’s attempt to assert a new claim in her memorandum in opposition to the motion, finding that “a plaintiff may not amend a complaint through a memorandum or brief.” Vo v. Tritten, 2017 WL 374906 (D. Minn. 1/26/2017).
• Motion to remand granted; attempt to avoid forum defendant rule rejected. Adopting a report and recommendation by Magistrate Judge Rau, Judge Schiltz remanded an action to the Minnesota courts, relying on the so-called “forum defendant rule,” and rejecting the defendant’s late-found attempt to establish that he was not, in fact, a Minnesota citizen. Deutsche Bank Nat’l Trust Co. v. Abed, 2017 WL 385040 (D. Minn. 1/27/2017).
Law Office of Josh Jacobson
• White House Executive Order: Protecting the Nation from Foreign Terrorist Entry into the United States; timeline and analysis.
On January 27, 2017, President Donald J. Trump issued an executive order, “Protecting the Nation From Foreign Terrorist Entry Into the United States,” that addressed a number of issues devoted to immigrants and immigration. Pertinent sections included:
- Section 3(c): Suspending entry for 90 days of immigrants and nonimmigrants from the countries of Iran, Iraq, Libya, Somalia, Sudan, Syria, and Yemen (with the exception of those traveling on diplomatic visas, North Atlantic Treaty Organization visas, C-2 visas for travel to the United Nations, and G-1, G-2, G-3, and G-4 visas).
- Section 5(a): Suspending the operation of the U.S. Refugee Admissions Program (USRAP) for 120 days in order to allow extensive review of the application and adjudication process.
- Section 5(b): Upon resumption of USRAP admissions, “prioritize refugee claims made by individuals on the basis of religious-based persecution, provided that the religion of the individual is a minority religion in the individual’s country of nationality.”
- Section 5(c): Suspending entry of Syrian refugees indefinitely—“until such time as I have determined that sufficient changes have been made to the USRAP to ensure that admission of Syrian refugees is consistent with the national interest.”
- Section 5(d): Restricting entry of refugees to 50,000 individuals for fiscal year 2017, allowing additional admissions when it is determined “that additional admissions would be in the national interest.”
- Section 5(e): Notwithstanding the 120-day suspension of the USRAP, the Departments of State and Homeland Security may jointly determine on a case-by-case basis that admission is in the national interest, “including when the person is a religious minority in his country of nationality facing religious persecution, when admitting the person would enable the United States to conform its conduct to a preexisting international agreement, or when the person is already in transit and denying admission would cause undue hardship—and it would not pose a risk to the security or welfare of the United States.”
- Section 5(g): Gives state and local jurisdictions a role in determining placement of refugees in their jurisdictions, “to the extent permitted by law and as practicable.”
- Section 8(a): Immediate suspension of the Visa Interview Waiver Program.
On January 30, the state of Washington filed a complaint with the U.S. District Court (Western District of Washington) seeking declaratory and injunctive relief against defendants Donald J. Trump in his capacity as president of the United States; the U.S. Department of Homeland Security (DHS); John F. Kelly, in his capacity as secretary of DHS; Tom Shannon, in his capacity as acting secretary of state; and the United States of America. The complaint specifically challenged Sections 3(c), 5(a)-(c), and 5(e) by asking the district court to declare them illegal and unconstitutional while enjoining their enforcement nationwide. The state of Washington also filed an emergency motion for a temporary restraining order seeking to enjoin enforcement of those sections.
On February 1, the State of Minnesota was added as a plaintiff with an amended complaint. The states sought declaratory relief invalidating certain provisions of the executive order and an order enjoining the defendants from enforcing those provisions.
On February 3, U.S. District Court Judge James L. Robart issued a temporary restraining order enjoining and restraining the defendants from enforcing Sections 3(c), 5(a) (as it relates to action that prioritizes refugee claims of certain religious minorities), 5(b), 5(c), and 5(e) (as it relates to action prioritizing refugee claims of certain religious minorities). Judge Robart further ordered the TRO to be granted on a nationwide basis and prohibited enforcement of those sections of the executive order at all U.S. borders and ports. “The work of the Judiciary, and this court, is limited to ensuring that the actions taken by the other two branches comport with our country’s laws, and more importantly, our Constitution.”
On February 4, the government filed a notice of appeal to the 9th Circuit Court of Appeals and an emergency motion for a stay, including an immediate stay while its emergency stay was being considered.
On February 5, the 9th Circuit Court of Appeals rejected the government’s request for an immediate stay “pending full consideration of the emergency motion for a stay pending appeal”.
On February 9, a three-judge panel of the 9th Circuit Court of Appeals denied the government’s emergency motion for a stay pending appeal.
Key points of the decision:
- 1) The states had standing to sue because the executive order caused a “concrete and particularized injury to their public universities [involving faculty and students, both actual and prospective, who were nationals of the affected countries] which the parties do not dispute are branches of the States under state law”;
- 2) The courts had authority to review executive action to ensure compliance with the Constitution;
- 3) The government was unlikely to succeed on its appeal of the TRO given the states’ due process clause claim involving permanent residents, persons who are in the United States (even if unlawfully), non-immigrant visa holders who temporarily departed or wish to temporarily depart the United States, refugees, and applicants with a relationship to a U.S. resident or institution with rights to assert. (“We are not persuaded that the Government has carried its burden for a stay pending appeal.” That is, “a strong showing that [it] is likely to” prevail against the States procedural due process claims.”);
- 4) The TRO should not be restricted in its geographical scope given the fact that a “fragmented immigration policy would run afoul of the constitutional and statutory requirement for uniform immigration law and policy”;
- 5) The government failed to provide any evidence that a stay was needed to avoid irreparable injury, since there was no showing that a noncitizen from any of the affected countries had committed a terrorist attack in the United States. Essentially, “The Government has taken the position that we must not review its decision at all”;
- 6) The states contended the executive order violated the establishment and equal protection clauses with the intention to “ban” Muslims. The court declined to address this issue at the present time but chose to “reserve consideration of these claims until the merits of this appeal have been fully briefed.” Further, “We hold that the Government has not shown a likelihood of success on the merits of its appeal, nor has it shown that failure to enter a stay would cause irreparable injury, and we therefore deny its emergency motion for a stay.”
On February 10, the 9th Circuit Court of Appeals issued an order requesting briefs from the parties to address the issue of whether the panel’s decision should be reconsidered en banc following a sua sponte request by a judge on the court.
On February 14, U.S. District Court Judge James L. Robart issued an order concluding the matter of the temporary restraining order is now before the 9th Circuit Court of Appeals as a construed appealable preliminary injunction. Judge Robart found no reason to delay further litigation on other matters raised in the complaint filed by the states of Washington and Minnesota, instructing the parties to proceed with the case. At the time of this writing, the government is considering its options, including issuance of a revised executive order.
R. Mark Frey
Frey Law Office
• Fort Berthold Reservation boundaries remain intact. Under the Major Crimes Act, 18 U.S.C. §1153, the United States has jurisdiction over certain crimes committed by Indians in Indian country. An Indian defendant was tried and convicted in federal court of a crime committed in New Town, North Dakota—a city within the 1891 treaty boundaries of the Fort Berthold Reservation. On appeal, the defendant argued that the federal court lacked jurisdiction over his crime because New Town was carved out of the reservation by a 1910 homestead act and so was not Indian country.
The 8th Circuit affirmed the conviction, resting its decision on two of its prior opinions that rejected the same argument regarding the effect of the 1910 act. See Duncan Energy Co. v. Three Affiliated Tribes of the Fort Berthold Reservation, 27 F.3d 1294 (8th Cir. 1994); City of New Town v. United States, 454 F.2d 121 (8th Cir. 1972). Although the defendant argued that a later opinion of the Supreme Court called the first of the 8th Circuit’s opinions into question, the 8th Circuit distinguished the Supreme Court opinion and held that “New Town was just as much part of the Fort Berthold Reservation when Bear committed his crimes as it was in 1891.” United States v. Bear, 844 F.3d 981 (8th Cir. 2016).
• “Bad men” treaty provision protects against off-reservation wrongs. A police chase ended on-reservation when the suspect was shot in the back of the head. Accounts of the shooting differ, but state and local officers did not render aid to the still-alive suspect in the 32 minutes it took for medical responders to arrive at the scene. The suspect was transferred to and pronounced dead at an off-reservation medical facility, then transferred to an off-reservation mortuary. Local officers allegedly manipulated and desecrated the suspect’s body, and a medical examiner refused to perform an autopsy. Meanwhile, federal officers assumed jurisdiction over the case and secured the suspect’s gun. But after an investigation, a federal judge forfeited the gun to the United States and the federal officers destroyed it.
In addition to separate suits against state and local officers, in the treaty case, the suspect’s estate, next of kin, and the Ute Indian Tribe of the Uintah and Ouray Reservations sued the United States for, among other things, violations of an 1868 Indian treaty. That treaty provides that “[i]f bad men among the whites or among other people, subject to the authority of the United States, shall commit any wrong upon the person or property of the Indians, the United states will… proceed at once to cause the offender to be arrested and punished according to the laws of the United States, and also reimburse the injured person for the loss.” They argued that by acting in concert with local officers, failing to secure the suspect’s body against desecration, participating in or allowing spoliation of evidence, failing to investigate the suspect’s death, and failing to protect the integrity of the reservation boundaries and tribal interests in the crime scene, the United States violated this provision of the treaty.
The Court of Federal Claims dismissed the suit, concluding that the claims were not covered by the bad-men provisions. It limited the treaty’s “any wrong” language to affirmative criminal acts committed on-reservation. The Federal Circuit Court of Appeals reversed. Although it agreed that the provision applied only to criminal wrongs, the appeals court held that the bad-men provision included protection from wrongs occurring off-reservation, at least if the off-reservation wrongs had a sufficient connection to on-reservation wrongs. It also remanded for further consideration of what criminal laws to apply and whether the treaty protected against criminal omissions in addition to criminal acts. Jones v. United States, ___ F.3d ___, 2017 WL 382373 (Fed. Cir. 1/27/2017).
• Treaty claims time barred. Under an 1866 Indian treaty with the Choctaw and Chickasaw Nations, proceeds from a land sale were to be held in trust for and ultimately paid to persons of African descent who were enslaved by the Choctaw and Chickasaw. The unrecognized Chakchiuma Nation claimed to be descendants of these beneficiaries, and sued the United States for proceeds under the treaty.
The Court of Federal Claims determined that the claim was time-barred in two respects. First, a 1946 statute created the Indian Claims Commission to hear a backlog of tribal claims against the United States, and directed it to “receive claims for a period of five years after the date of approval of this Act[.]” Under the statute, if a claim accrued before the Act’s passage but was not brought before the commission within the allotted time, no court or administrative agency may consider the claim. Because the Chakchiuma Nation’s claim accrued no later than 1868, the Court of Federal Claims could not consider it in 2016. Second, 28 U.S.C. §2501, the statute establishing the jurisdiction of the United States Federal Court of Claims, includes a six-year statute of limitations, which had also long ago passed. The court dismissed the time-barred claim for lack of subject-matter jurisdiction. Chakchiuma Nation v. United States, No. 16-594L, 2016 WL 7212321 (Fed. Cl. 12/9/2016).
• Oil-pipeline construction; #NoDAPL litigation and related developments. Legal and factual developments first outlined in the November 2016 and January 2017 editions of this column continue. On January 24, President Trump issued an executive order directing “expedit[ed] environmental reviews and approvals for high priority infrastructure projects.” A presidential memorandum of the same date directed the Corps to “review and approve [the disputed easement] in an expedited manner” and to “consider… whether to rescind or modify” the Corps’ December 4 refusal to issue the easement before considering alternative routes, treaty rights, and environmental risks, and to “withdraw” the agency’s Notice of Intent to Prepare an Environmental Impact Statement (EIS). In response, the acting Secretary of the Army ordered the Corps to issue all approvals to complete the project. On February 7, the Corps issued the necessary easements.
With changes at the executive and administrative level, the web of litigation has grown more acrimonious. On January 16, Dakota Access moved for a temporary restraining order to prevent the Corps from publishing its notice of intent to prepare an EIS. Although the court denied this motion, the issue was ultimately mooted by the Corps’ about-face decision to abort the EIS and to issue the necessary easement to Dakota Access. The U.S. District Court for the District of Columbia court denied the Cheyenne River Sioux Tribe’s motion for a temporary restraining order to prevent construction of the pipeline, reasoning that harm is not irreparable until oil flows through the pipeline. On this point, the court also ordered Dakota Access to provide an every-Monday update to the court concerning “the likely date that oil will begin to flow beneath Lake Oahe[.]” Both the Cheyenne River Sioux Tribe’s motion for preliminary injunction and the Standing Rock Sioux Tribe’s motion for summary judgment were pending at publication. The Oglala Sioux Tribe has also entered the fray, initiating a separate D.C. District Court suit against the Corps that seeks to prevent construction of the pipeline until the Corps completes an EIS that analyzes pipeline impacts on the Oglala Sioux’s treaty and water rights. For more information and continued coverage of the cases, visit https://turtletalk.wordpress.com.
Hogen Adams PLLC
Hogen Adams PLLC
• Landlord-tenant. In a case concerning a commercial tenant’s failure to keep the premises in good conditions, the Minnesota Federal District Court held that the appropriate measure of damages on a breach of contract claim is the cost of repairing the building to comply with lease obligations. The court rejected the tenant’s argument that diminution in value damages (from the tort and construction contexts) applies. In other words, when leased property is returned or surrendered, a landlord may seek all reasonable costs incurred in restoring the building to its original condition. On the matter of whether the property was maintained correctly, the lease required the tenant “faithfully to keep and observe all statutes and ordinances in force, relating to said leased premises, or the use thereof.” The court, citing to Pennsylvania and Wisconsin decisions, concluded that this provision does not require the tenant to update the building (originally built in the early 20th century) to current-day standards and codes for occupied buildings after it surrendered the property. The lease did not specify any particular use of the building by the tenant, and the tenant had left the building vacant for years. H.F.S. Props. v. Foot Locker Specialty, Inc., No. 15-3273, 2017 WL 455934 (2/2/2017).
• Easements. The Minnesota Court of Appeals recently considered a driveway dispute that arose from an application to register property and establish boundary lines. The Kraemers’ driveway encroaches upon Mahoney’s property, and has since 1965. The district court concluded the Kraemers were entitled to an easement, but appears to have determined that it was permissive, not prescriptive. The district court also ordered that they must relocate the driveway if it were ever reconstructed. The court of appeals reversed and determined that the driveway satisfied the elements of a prescriptive easement because it was being used “openly, visibly, continuously, and without molestation or objection” for at least the previous 15 years. Because the easement is prescriptive, the district court therefore erred in using its equitable powers to order relocation in the event of reconstruction. In re Application of Mahoney, No. A16-0760, 2017 WL 164429 (Minn. Ct. App. 1/17/2017) (unpublished).
• Adverse possession. The Minnesota Court of Appeals considered an adverse possession claim relating to certain farmland. The court affirmed the district court’s findings regarding actual possession, open possession, exclusivity, continuous possession, and hostility, at least to a portion of the property. The previous owners, before 2010, had farmed the properties according to what they believed were the property lines (the “recognized boundary”), but which were not in accordance with the survey boundaries. After 2010, new owners tilled further past the recognized boundary. The court remanded for the district court to determine the precise location of the recognized boundary, because while the post-2010 owners were entitled to the property up to the recognized boundary, they had farmed past it since purchasing and were not entitled to the newly farmed property. Dobis v. Scegura, No. A16-1090, 2017 WL 393574 (Minn. Ct. App. 1/30/2017) (unpublished).
Meagher & Geer, PLLP
• Jurisdiction under the Tax Injunction Act. Diversified Ingredients, Inc., a Missouri corporation, challenged an assessment of over half a million dollars in taxes by the Ohio Department of Taxation under Ohio’s Commercial Activity Tax (CAT). CAT is an annual tax on “the privilege of doing business in this state.” See Ohio Rev. Code §5751.02(A). Diversified sued the Ohio State Tax Commissioner in federal district court, seeking a declaratory judgment that the Interstate Income Act (IIA), 15 U.S.C. §381, deprives Ohio of jurisdiction to assess and collect the CAT on Diversified’s sales shipped into Ohio. CAT imposes tax on a corporation’s gross income, while the federal law IIA limits taxation to net income if the business activities are limited within the destination state. The federal district court declined to rule on this issue, and instead dismissed the action for lack of subject matter jurisdiction under Tax Injunction Act (TIA), 28 U.S.C. §1341. TIA provides: “The district courts shall not enjoin, suspend or restrain 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 appealed the dismissal to the 8th Circuit Court of Appeals, contending that the district court erred because federal courts have the exclusive jurisdiction to interpret IIA. Relying on Supreme Court precedent that state courts have jurisdiction to rule on the applicability of the IIA, the Circuit Court rejected the argument. The Ohio Revenue Code also allows taxpayers a right to an Ohio appellate court that will “hear and decide” a claim that a state tax has been invalidly assessed or collected. The Ohio state courts have jurisdiction to hear Diversified’s claim that CAT violates the IIA limitation of out-of-state transactions. In summary, the 8th Circuit affirmed the lower court’s decision because Ohio state courts provide a plain, speedy, and efficient remedy for misapplied taxes, and can rule on IIA. Diversified Ingredients, Inc. v. Testa, No. 16-2791, 2017 WL 279503 (8th Cir. 2017).
• President’s ability to dismiss tax court judges upheld. The United States Tax Court heard a motion seeking to disqualify all tax court judges and to declare unconstitutional the portion of the Internal Revenue Code that authorizes the president to remove tax court judges “after notice and opportunity for public hearing, for inefficiency, neglect of duty, or malfeasance in office, but for no other cause.” I.R.C. sec. 7443(f). The petitioner first argued that tax court judges cannot hear the motion to declare 7443(f) unconstitutional because each of the judges should be disqualified. Relying on the Rule of Necessity—a legal maxim positing that where all are disqualified, none are disqualified—the court satisfied itself that it could address the merits of the petition. The court then turned to the argument that Section 7443(f) is unconstitutional because it violates the separation of powers. Article III grants to the judicial branch the power to adjudicate disputes. Under the Public Rights Doctrine, however, Congress may assign Article I courts and judges to adjudicate public rights disputes which do not exercise that portion of the judicial power that is reserved for Article III judges. These Article I judges can hear only public rights disputes which are those between the government and persons subject to its authority in concurrence with those powers authorized to executive or legislative branches. Tax court is an example of an “Article I court.” The tax court has limited jurisdiction to hear cases between the Internal Revenue Service and citizens. Separation of powers concerns may be implicated if presidential removal power could interfere with “the constitutionally assigned mission” of the judicial branch. But if the president sought to exercise the power to remove a tax court judge, the president would not be affecting any matter within the portion of the “Judicial Power of the United States” that is necessarily exercised by Article III judges. The tax court handles no such matters, and the separation of powers is therefore not violated. It is argued that the tax court exercises a “quintessentially judicial” power, which makes it part of the judicial branch. But both the Constitution and court cases have established that interbranch removals are permissible. I.R.C. sec. 7443(f) gives roles to both president and the Judicial Conference of the United States to determine if a tax court judge should be removed for good cause. This is an acceptable form of interbranch removal because there is no room for the president to exercise coercive influence on tax court judges. Even if the tax court was a judicial function, Section 7443(f) does not violate the separation of powers doctrine; therefore, the United States Tax Court dismissed the petitioner’s motion. Battat v. Commissioner, 148 T.C. No. 2 (2/2/2017).
• Constitutionality under the excessive fines clause. A married taxpaying couple reported a loss from an asset-debt transaction, which was used to offset five years of income. The taxpayer, however, failed to disclose relevant facts relating to this transaction as required by law and it was determined that the loss was misapplied. The failure to disclose relevant facts led to the imposition of a 30% penalty on the underreported income. The taxpayer challenged the constitutionality of this penalty under the excessive fines clause of the 8th Amendment. “The Excessive Fines Clause limits the government’s power to extract payments, whether in cash or in kind, as punishment for some offense.” Thompson v. Commissioner, 148 T.C. No. 3, 2017 WL 448978 at *2 (Feb. 2, 2017) (quoting Austin v. United States, 509 U.S. 602, 609-610 (1993) (additional internal citation omitted)). Penalties and taxes such as that imposed on this taxpayer can serve various purposes: to generate government revenue, impose fiscal burdens, and deter certain behavior. But at some point the tax becomes a punishment, and when that happens, the punishment is subject to the strictures of the excessive fines clause of the 8th Amendment. To determine when a fine passes this line, the court uses the Bajakajian test, from United States v. Bajakajian, 524 U.S. 321, 334 (1998). The tax court explained that “to answer the question whether section 6662A violates the Eighth Amendment, we need to answer two questions: (1) whether section 6662A constitutes punishment for an offense; and (2) whether the punishment is grossly disproportional to the gravity of the offense.” Thompson, at *3.
Courts often rule that tax penalties are remedial, not punitive. To be remedial the tax must be a safeguard for the protection of the revenue and must be intended to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayer’s fraud. In this case, the Tax Court reasoned, the 30% tax penalty assessed on Thompson was remedial because it served to recuperate the losses the government incurred to investigate cases of underreported income. The court then turned to the second prong: in previous cases, courts have determined a 75% civil fraud penalty not to be grossly disproportionate; given that case law, this court reasoned that the 30% tax penalty does not meet the standard for “grossly disproportionate.” Because of the low detection rates of underreported income and high costs of to detect and prosecute, this tax penalty is justified. Therefore, the tax court held that the 30% penalty imposed by Section 662A does not violate the excessive fines clause of the 8th Amendment. Thompson v. Commissioner, 148 T.C. No. 3, 2017 WL 448978 (2/2/2017).
• Sales and use tax: 10 percent negligence penalty affirmed. During the six years under review, the appellant failed to report approximately 50 percent of its taxable sales and accordingly failed to remit sales tax collected on those unreported sales. Appellant testified that approximately 95 percent of sales were taxable, but within the point-of-sale system, approximately 50 percent of sales tax amounts were not itemized on receipts, but instead included in the full amount (thus making the sale look like a non-taxable one). Appellant incorporated these incorrect figures from the point-of-sales system into Quickbooks and subsequently failed to remit sales tax on those sales for six years. During the years at issue, appellant relied upon a certified public accountant whose license was revoked for violating several Minnesota statutes near the end of the period at issue. Minnesota Statute 289A.60, subdivision 5 provides for a negligence penalty if an additional assessment is due to “negligence or intentional disregard” without the intent to defraud. Appellant argued that it did not know about the error; appellant pointed to its own lack of accounting knowledge and to what it termed its reasonable reliance upon the now-uncertified CPA. Because the appellant forwarded the sales records to its accountant, appellant failed to establish reasonable reliance and the tax court affirmed the commissioner’s application of an additional 10 percent negligence penalty. JA-KE of Eagle Lake, Inc. v. Comm’r, 2017 WL 385782 (Minn. T.C. 1/26/2017).
• Award of expenses unjust due to contentious history. Petitioner brought a motion seeking attorney’s fees, expenses, and costs it incurred in opposing the City of Wayzata’s motion to quash and motion for a protective order as part of an earlier proceeding. Although the city’s motions were denied in that proceeding, the tax court declined to award fees and expenses. The tax court declined to follow Kernik—an unpublished court of appeals decision—and determined that Rule 37.01 does not only apply to motions to compel. The tax court concluded that the relationship between the parties was “contentious” and found that an award of expenses would be unjust. Berry & Co., Inc. v. Hennepin Co., 2017 WL 385783 (Minn. T.C. 1/24/2017).
• Validity of commissioner’s indirect audit methodology set for trial. Appellants moved for summary judgment, arguing that the general statute of limitations (3.5 years) had run for their sales and use tax audit. The commissioner argued that subdivisions 1 and 6 of Minnesota Statue 289A.38 were meant to be read in conjunction, thus allowing the commissioner to extend the statute of limitations to 6.5 years if the assessed tax liability exceeded 25 percent of the tax reported on the taxpayer’s return. The tax court agreed with the commissioner’s position and denied appellants’ motion by determining that the underlying tax obligation was a fact question yet to be determined. The commissioner’s motion for late-file and late-pay penalties were uncontested by appellants and were granted by the tax court. Finally, the commissioner’s partial motion for summary judgment on the additional tax owed was denied. The commissioner’s auditor did not review any direct records from the appellants but rather proceeded directly to an indirect audit. Appellants disputed the commissioner’s assessment that their records were inaccurate, eventually leading to the commissioner’s auditor performing a direct audit on a two-month sample of data. This direct audit resulted in a lower tax liability than the indirect audit. Ultimately, the tax court determined the validity of the indirect audit was an issue of material fact and denied the commissioner’s motion for partial summary judgment. Topshelf Club Inc. v. Comm’r, 2017 WL 253749 (Minn. T.C. 1/172017).
• Property tax: Homeowner permitted to testify as expert. In an interesting twist to the usual property tax appeal, the tax court had to determine whether petitioner’s wife—a realtor and real estate agent—could testify as an expert to the value of the subject property. The court determined she had sufficient interest to testify by virtue of her marital interest in the property, even though her name was not on the property records. Further, the court determined that the county failed to produce legal authority to prevent her to testify in regard to value of the subject property by virtue of her experience as a realtor and real estate agent. The court accepted all but one of petitioner’s comparables under the sales comparison approach (which was accepted with an adjustment) and accepted all of the county’s comparables without adjustment. By giving roughly equal weight to the six remaining comparables presented by the county and the petitioner, the court arrived at a lower final market value for the property. Ranum v. Washington Co., 2017 WL 253752 (Minn. T.C. 1/6/2017).
• Conformity bill now law. Last month’s Tax Notes & Trends noted the passage through the Minnesota House of the conformity bill. That bill is now enacted as law, and brings Minnesota’s Code into conformity with changes made to the federal tax code in 2015. Among other changes, the conformity bill impacts the deductibility of education classroom expense up to $250; qualified higher education tuition and related expenses; mortgage insurance premiums; various charitable contributions, including tax-free IRA distribution up to $100,000 to certain public charities for those over age 70 ½; and discharges of indebtedness on principal residences. The law also provides an increase in the working family credit; changes the business equipment depreciation schedule; permits 100% exclusion of the gain on sale of qualified small business stock held for more than five years; and permits more generous depreciation rules for leasehold and restaurant improvements.
Mitchell Hamline School of Law
TORTS & INSURANCE
• No-fault: Anti-assignment clause enforceable. Plaintiff provided medical treatment to policyholders of defendant insurer. Prior to the treatment, plaintiff required each policyholder to execute an assignment of benefits under their respective insurance policy. Then, treatment was provided, each policyholder was billed directly, and each policyholder submitted a claim to insurer. After the insurer denied each claim, the policyholders obtained no-fault arbitration awards encompassing the medical treatment provided by plaintiff. After the insurer paid those awards directly to its policyholders, plaintiff commenced suit seeking payment pursuant to the assignments. The insurer filed a motion for summary judgment, relying on an anti-assignment clause contained in the insurance policies, stating, “[i]nterest in this policy may be assigned only with [the insurer’s] written consent.” The district court denied the insurer’s motion for summary judgment, but the court of appeals reversed.
The Minnesota Supreme Court affirmed the decision of the court of appeals granting summary judgment in favor of the insurer. As a threshold matter, the Court determined that it had subject-matter jurisdiction because whether or not the anti-assignment clauses contained in the policy were enforceable was a question of law. The Court went on to hold that the anti-assignment clause was enforceable in this case. The Court first looked to general principles of contract law, which hold that anti-assignment provisions are generally enforceable. Second, the Court cited the rule adopted by a majority of jurisdictions around the country that have considered anti-assignment clauses in insurance policies outside of the no-fault context, which holds anti-assignment clauses enforceable when applied to preclude pre-loss assignments, but not post-loss assignments. The court declined to expressly adopt either rule, concluding it did not need to do so because under either rule it would conclude that the anti-assignment clause was valid and enforceable in this case because the assignment was made pre-loss, relying on the No-Fault Act’s definition of “loss” as “economic detriment resulting from the accident causing the injury, consisting only of medical expense, income loss.” Stand Up Multipositional Advantage MRI, P.A. v. Am. Family Ins. Co., A15-0843 (Minn. 1/11/2017) http://mn.gov/law-library-stat/archive/supct/2017/OPA150843-011117.pdf