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

Notes & Trends – July 2017

ADMINISTRATIVE LAW
JUDICIAL LAW

• State agency’s imposition of more stringent standards than required by federal program is arbitrary and capricious. The Minnesota Court of Appeals held that the Minnesota Department of Education (MDE) acted arbitrarily and capriciously when it subjected a nonprofit to more stringent financial viability requirements than required by the federal nutritional program it was administering.

The federal Child and Adult Care Food Program (CACFP) is a cooperative federalism program administered by the U.S. Department of Agriculture and participating state agencies—in this case, MDE. The program was established by regulation under the authority of the National School Lunch Act to provide reimbursement for meals served to children and adults in daycare. The state agency’s role is to screen program applicants and reimburse approved program providers for permissible expenses.

In 2015, Partners in Nutrition (PIN), a nonprofit, was approved by MDE to operate under the program at a single program site. In 2016, however, PIN’s application to operate at additional sites was denied based on MDE’s concerns about PIN’s financial viability. Federal regulations require program participants to have “adequate sources of funds to continue to pay employees and suppliers during periods of temporary interruptions in Program payments.” MDE found that PIN did not have those alternative sources of funds and was overly dependent on reimbursement payments to cover its operating expenses.

An MDE appeals board reversed this decision, finding that MDE lacked specific criteria for denying an application on financial viability grounds. On remand, the agency set forth a detailed methodology for assessing financial viability and asked PIN to provide responsive documentation. PIN declined to provide most of the requested information, arguing that MDE’s new methodology went beyond the requirements of federal law. MDE once again denied PIN’s application and the decision was upheld by the MDE appeals board. PIN then sought review in the court of appeals.

The court of appeals agreed with PIN that MDE had imposed requirements above and beyond the federal program’s requirements. The court noted that federal regulations do empower a state agency to “use its discretion in determining” whether an applicant meets program standards. Nevertheless, the court observed that federal regulations do not require any specific level of capitalization or specify forms of proof of financial viability. Additionally, the court pointed to USDA statements in the rulemaking record and in a guidance handbook suggesting that applicants should be allowed to rely on reimbursements as their primary source of funds. The court therefore agreed with PIN that MDE’s imposition of more stringent standards than those contemplated by the federal program was arbitrary and capricious. However, the court denied PIN’s request to order MDE to approve its application, instead remanding to the agency for reconsideration of the application in light of the court’s decision. In re Partners in Nutrition’s Appeal of Disapproval of Site Expansion in the CACFP Program, __ N.W.2d __, 2017 WL 2062123 (5/15/2017).

Mehmet Konar-Steenberg

Mitchell Hamline School of Law

 

CRIMINAL LAW
JUDICIAL LAW

• Guilty plea: Misinformation about collateral consequence does not render guilty plea unintelligent. Respondent pleaded guilty to battery, robbery, and resisting police in Florida. He served time in prison and was placed on probation. He transferred his remaining year of probation to Minnesota, during which he was charged with and pleaded guilty to being an ineligible person in possession of a firearm. He was extradited to Florida and informed that he faced a potential life sentence for violating his probation. Respondent petitioned the district court to withdraw his guilty plea, arguing the plea was unintelligent because he was not advised about the potential life sentence in Florida and because his attorney inaccurately advised him that the worst possible scenario would be serving the remainder of his Florida probation sentence. The district court granted respondent’s request to withdraw his plea, finding the plea unintelligent and invalid due to the fact that respondent was not informed about the “direct” consequence that his conviction would have on his potential Florida probation violation.

As a matter of first impression, the court of appeals holds that a potential probation consequence in an unrelated case is a collateral consequence of a guilty plea, because the potential probation consequence does not flow definitely, immediately, and automatically from the guilty plea. The intelligence requirement of a valid guilty plea ensures that a defendant understands, among other things, the consequences of his plea. This requirement refers only to direct consequences of a plea. Lack of awareness of collateral consequences does not render a plea unintelligent. As with eventual criminal charges, which the court previously found to be a “contingency that may not occur,” a life sentence in Florida is also a “contingency that may not occur.” Respondent does not argue that a life sentence in Florida is assured, only that his plea exposed him to the possibility, so the potential life sentence is not definite, immediate, or certain.

The court of appeals holds that a potential probation violation penalty in an unrelated case is not a direct consequence of a defendant’s guilty plea and conviction. The district court erred when it determined that respondent’s potential life sentence in Florida was a direct consequence of his Minnesota guilty plea.

The court of appeals also considers whether the district court properly allowed respondent to withdraw his guilty plea because his attorney misadvised him of the potential probation consequence. The court concludes that misinformation about a collateral consequence does not render a guilty plea unintelligent and manifestly unjust. The case is reversed and remanded to the district court to reinstate respondent’s conviction. State v. Willie James Brown, Ct. App. 5/8/2017.

• DWI: Birchfield and Trahan do not apply retroactively on collateral review. Appellant was convicted three times for first-degree DWI in Hennepin and Scott counties. Two of the DWI charges were based on urine tests, and another was based on a blood test, none of which were supported by warrants. His convictions were affirmed on appeal both prior and subsequent to Missouri vs. McNeely. The Minnesota Supreme Court ultimately concluded that the warrantless searches of appellant’s blood and urine were reasonable under the consent exception to the warrant requirement. Appellant petitioned for post-conviction relief in Scott and Hennepin counties, arguing that his consent to the chemical tests was involuntary because it was based on misleading and inaccurate implied consent advisories. He relied on Birchfield, Thompson, and Trahan. Appellant’s post-conviction petitions were denied, with the post-conviction courts concluding that Birchfield, Thompson, and Trahan do not apply retroactively.

The court of appeals notes that Birchfield, Thompson, and Trahan announced rules regarding the application of the search incident to arrest exception to the warrant requirement in the context of DWI chemical testing. Appellant argues that if these cases apply retroactively, they require reevaluation of the Minnesota Supreme Court’s determination regarding the validity of his consent.

Cases announcing new constitutional rules of criminal procedure are applied retroactively only if (1) the rule places certain kinds of primary, private individual conduct beyond the power of the criminal lawmaking authority to prescribe, or (2) it is a “watershed rule of criminal procedure.” Appellant argues that Birchfield, Thompson, and Trahan do not announce new rules of constitutional criminal procedure. However, the United States Supreme Court in Birchfield indicated that it was breaking new ground regarding the search incident to arrest exception to the warrant requirement. The court of appeals also previously concluded that McNeely established a new rule regarding the exigent circumstances exception to the warrant requirement. The rules announced in McNeely, as well as Birchfield, Thompson, and Trahan, all established, for the first time, that law enforcement cannot rely on grounds previously relied upon to support searches conducted as part of DWI chemical testing.

Because appellant argues that the rules announced in Birchfield, Thompson, and Trahan are not new rules of criminal procedure, he presents no argument regarding the application of either exception that would allow the retroactive application of the rules. Thus, the court concludes that the new rules announced in Birchfield, Thompson and Trahan do not apply retroactively on collateral review of a final conviction. The post-conviction court’s denials of appellant’s claims are affirmed. Wesley Eugene Brooks v. State, Ct. App. 5/15/2017.

• Juvenile: Miller v. Alabama does not extend to juvenile with three consecutive life sentences with possibility of release. When he was 16 years old, appellant shot and killed three men during a robbery. After a jury trial, he was convicted of three counts of murder, and his convictions were affirmed on appeal. He later appealed from the district court’s order sentencing him to three consecutive terms of life imprisonment with the possibility of release. Appellant argues that the rule announced in Miller v. Alabama should be extended to his case, because his three consecutive sentences are the functional equivalent of life without the possibility of release (LWOR).

In Montgomery, the United States Supreme Court clarified that Miller barred “life without parole… for all but the rarest of juvenile offenders, those whose crimes reflect permanent incorrigibility.” The United States Supreme Court has not specifically addressed the issue of whether the Miller/Montgomery rule should be extended to cases in which a juvenile homicide offender receives consecutive sentences of life imprisonment with the possibility of release that the juvenile contends are, in the aggregate, the functional equivalent of LWOR, or whether consecutive sentences should be viewed separately when conducting a proportionality analysis under the 8th Amendment. A number of other courts have considered these issues, but have reached differing conclusions. Because the United States Supreme Court has not held that the Miller/Montgomery rule applies to sentences other than LWOR, and the Court has not squarely addressed the issues presented in this case, the Minnesota Supreme Court declines to extend the Miller/Montgomery rule as requested by appellant. The district court’s sentencing decision is affirmed. State v. Mahdi Hassan Ali, Sup. Ct. 5/17/2017.

• Forfeiture: Electronic service of demand for judicial determination not effective without opposing party’s consent. Appellant’s attorney filed a complaint for judicial determination of forfeiture challenging the forfeiture of $4,657 and a vehicle. Court administration told the appellant’s attorney that the complaint would be served electronically. Appellant’s attorney believed the service requirements had been met, and mailed a copy of the complaint to the County Attorney’s Office, but the county never acknowledged service of the complaint. The county filed a motion to dismiss for lack of subject matter jurisdiction based on appellant’s failure to timely serve the complaint pursuant to Minn. R. Civ. P. Rule 4.05. The district court ultimately dismissed the complaint, and appellant appealed. Minn. Stat. §9.5314 requires that a copy of a complaint for judicial determination of forfeiture be served on the prosecuting authority as provided under Minn. R. Civ. P. 4. The Rules of Civil Procedure make clear that service of a complaint when commencing an action must be completed by personal service, publication, or U.S. mail. When serving a party by mail, service is completed on the date of acknowledgment of service. The rules do not permit electronic service unless the opposing party consents. The county did not consent to electronic service in this case, nor did it acknowledge service of the complaint by mail.

Held, service of a demand for judicial determination of forfeiture must be completed as specified in Minn. R. Civ. P. 4, unless electronic service is consented to by opposing party. The district court did not err in dismissing this matter, because appellant did not satisfy the service requirements. Justin Alan Kokosh v. $4,657.00 U.S. Currency, et al., Ct. App. 5/22/2017.

• Circumstantial evidence: No change to circumstantial evidence standard of review. On appellant’s appeal from his conviction for possessing a firearm as an ineligible person, the court of appeals reversed the conviction finding insufficient evidence to support the jury’s verdict. The state appealed, asking the Minnesota Supreme Court to abandon the standard of review applied to convictions based on circumstantial evidence, because it is unnecessarily complicated, confusing, misleading, and difficult to apply.

The circumstantial evidence standard of review requires a reviewing court to examine the circumstances proved and independently consider all reasonable inferences that can be drawn from those circumstances, when viewed as a whole. The Supreme Court disagrees with the state that the standard of review creates confusion for appellate courts because it can be difficult to identify the “circumstances proved.” The Court reaffirms that the jury is in the best position to determine the credibility of witnesses and weigh the evidence, that the first step of the circumstantial evidence test requires the Court to resolve all questions of fact in favor of the jury’s verdict, and that the second step is for the appellate court to consider whether reasonable inferences consistent and inconsistent with guilt can be drawn from the circumstances proved.

Because the state has not established a compelling reason to overrule the Court’s precedent with respect to the circumstantial evidence standard of review, the Court declines to do so. In reviewing the sufficiency of the evidence to support appellant’s conviction, the Supreme Court agrees with the court of appeals that the evidence was insufficient. State v. Carlos Maurice Harris, Sup. Ct. 5/24/2017.

• Firearms: Metropolitan Airports Commission may regulate firearms. After leaving a loaded handgun in her purse, which she placed on a security checkpoint conveyor to be scanned at the MSP airport, appellant was charged with violating a Metropolitan Airports Commission (MAC) ordinance prohibiting anyone from putting a firearm through inspection equipment at a security checkpoint without first informing security personnel. Appellant was convicted after a trial on stipulated facts. She argues the MAC ordinance violates Minn. Stat. §471.633, which restricts certain entities from regulating firearms, and that the ordinance violates due process and the 2nd Amendment.

The court of appeals notes that the Legislature has specifically authorized the MAC to adopt ordinances relating to the management of its airports in Minn. Stat. §473.608, subd. 17(1). It also notes that the Legislature has deemed the MAC a “municipality,” and afforded municipalities the power to adopt ordinances. Section 471.633 only restricts the MAC from regulating firearms if it falls into one of the categories of entities listed: home rule charter or statutory city, county, town, municipal corporation, and “other governmental subdivision.” The MAC is not a city, county, or town. The Legislature has labeled the MAC as a “municipality,” but not specifically a “municipal corporation.” A “governmental subdivision” is not defined by the Legislature, and the Legislature has not expressly defined the MAC as a “governmental subdivision.” Where the Legislature wants to designate an entity as a “governmental subdivision,” it generally does so expressly.

The court applies the doctrine ejusdem generis, finding that the listed entities in section 471.633 have the character of residential communities, while the MAC much more closely resembles an administrative agency, and, thus, was not intended by the Legislature to fall within the scope of section 471.633. The court concludes that section 471.633 does not preclude the MAC from regulating firearms.

The court also concludes that the MAC ordinance does not violate due process or the 2nd Amendment. Appellant’s conviction is affirmed. State v. Inez Fern Eide, Ct. App. 5/30/2017.

Frederic Bruno 

Bruno Law

Samantha Foertsch

Bruno Law

 

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Age discrimination; arbitration compelled. An employer’s challenge to denial of a motion to compel arbitration of age discrimination claims brought by 33 employees was successful before the 8th Circuit Court of Appeals. Reversing a ruling of U.S. District Court Judge Tunheim in Minnesota, the court ruled that the claims by plaintiffs under the Age Discrimination in Employment Act (ADEA) are subject to an arbitration agreement and, in the absence of any contrary statute, the arbitration must be compelled. McLeod v. General Mills, Inc., 854 F.3d 420 (8th Cir. 4/14/2017).

• Race discrimination; summary judgment upheld in salary dispute. An African-American employee who claimed that he was subject to race discrimination reflected in a salary disparity had his claim dismissed by the 8th Circuit. The court upheld a lower court ruling granting summary judgment on grounds that the claimant did not show that the employer’s reasons for the salary disparity with white employees constituted a pretext for discrimination and the claimant also failed to identify similarly situated employees who were treated differently to show that the denial of a bonus was discriminatory. Nor was there any evidence of a racially hostile environment. Stone v. McGraw Hill Fin., Inc., 856 F.3d 1168 (8th Cir. 5/15/2017).

• Race discrimination; disparate treatment dismissed, retaliation reversed. A claim of disparate treatment based on race by an employee against a state agency was rejected, but the employee’s claim for retaliation was allowed to proceed. The 8th Circuit, reversing the lower court, held that the disparate treatment claim lacked sufficient evidence, but that there was sufficient evidence to infer “more than the mere possibility” that the employee was subject to retaliation, leading to remand and trial on that issue. Wilson v. Ark. Dep’t of Human Servs., 850 F.3d 368 (8th Cir. Cir. 5/1/2017).

• Unpaid overtime; driver entitled to pay. The driver of a medical van was entitled to recover overtime pay under the Fair Labor Standards Act and under state law by the 8th Circuit, which upheld a determination that the employer was liable for overtime pay because the driver was covered under an agreement with the employer. LaCurtis v. Express Med. Transporters, Inc., 856 F.3d 571 (8th Cir. 5/10/2017).

• Gender discrimination; retaliation claim dismissed. Gender discrimination and retaliation claims by a construction crane operator employee were dismissed by the 8th Circuit because the time period between the protected activity and the adverse employment action was “too attenuated” to establish causation. Affirming a ruling of U.S. District Court Judge Paul Magnuson in Minnesota, the court also held that there was a lack of evidence to infer discriminatory motive, and the employee was unable to overcome the employer’s claim that there was legitimate grounds for terminating the employee. Liles v. C.S. McCrossan, Inc., 851 F.3d 810 (8th Cir. 3/21/2017).

• Public sector employment; no due process or hearing rights. The termination of a 30-year employee of the Lyon County Highway Department was upheld by the Minnesota Court of Appeals on grounds that he admitted to theft of county gravel while on the job. Affirming a ruling of the Lyons County District Court, it held that because the claimant was an at-will employee, he had no property interest and his employment was not entitled to any due process or post-termination evidentiary hearing. Doom v. Cty. of Lyon, 2017 Minn. App. LEXIS 369 (Minn. App. 4/24/2017) (unpublished).

• Employee indemnification; negligence action by employer disallowed. An employer who was required to indemnify a public sector employee under Minn. Stat. §181.970 may not sue the employee for negligence in order to recoup payments made to a third party. The Minnesota Court of Appeals, affirming a ruling of the Hennepin County District Court, held that the indemnification statute bars any recoupment claim against the employee. First Class Valet Services, LLC v. Gleason, 892 N.W.2d 848 (8th Cir. 3/20/2017).

• Unemployment compensation; “misconduct” upheld for racial language. An employee who sent an email to a co-worker describing another co-worker as a “disrespectful colored girl” was properly denied unemployment compensation benefits. The court of appeals ruled that the incident constituted “disqualifying misconduct.” Hursey v. Homeservices Lending, LLC, 2017 Minn. App. LEXIS 339 (Minn. App. 4/17/2017) (unpublished).

• Unemployment compensation; quit defense reversed. An employee was denied unemployment compensation benefits in a rare reversal by the court of appeals after she quit her job. Overturning a decision of an unemployment law judge (ULJ), the court held that the employee was ineligible for unemployment compensation benefits because she quit her job without good reason when she left her job after her uncle, who was her only client as a personal care attendant (PCA), left the country. Because the employee did not request a new work assignment from the staffing agency that employed her within five days after her uncle left, she was not eligible for unemployment compensation benefits because she was not seeking “suitable” employment. Jama v. Wise Home Health Care, Inc., 2017 Minn. App. LEXIS 344 (Minn. App. 4/17/2017) (unpublished).

LEGISLATION

• Employment law changes. The Minnesota Legislature, which went into a short special session, ended up passing a number of measures that affect employment law.

They include the following:

  • Raises were cut in half for members of Service Employee’s International Union (SEIU), who work as home health care workers.
  • Less onerous licensing provisions were enacted for new teachers, along with a measure that bolsters the ability of local school districts to opt out of the “last in, first out” seniority rules in hiring of teachers.
  • A measure that would have restricted Minnesota cities from setting their own workplace standards, including sick and parental leave requirements, was passed by the Legislature but vetoed by Gov. Mark Dayton. The veto, however, also encompassed a new benefit that had been included to allow state workers to receive paid parental leave, a practice that had been implemented by regulation but needed formal legislative action to become permanent.

Meanwhile, at the Federal level, the Trump administration has proposed, as part of its newly announced budget, a requirement that employers provide paid family leave for six weeks and another six weeks of unpaid family leave upon the birth or adoption of a child. The budget, however, has run into a poor reception in Congress and elsewhere and is unlikely to pass. It is unclear what will happen with the family leave provision, which does not have a funding source identified in the budget, nor any specificity regarding eligibility for the leave.

 Marshall H. Tanick

 Hellmuth & Johnson, PLLC

 

FEDERAL PRACTICE
JUDICIAL LAW

• Daimler; general personal jurisdiction over corporation; dissent. Expanding on its recent Daimler decision, the Supreme Court held that the defendant railroad was not subject to general personal jurisdiction in Montana even though it had more than 2,000 miles of track and 2,000 employees in the state.

Justice Sotomayor dissented in relevant part, concluding that the majority’s personal jurisdiction analysis resulted in a “jurisdictional windfall” to multistate and multinational corporations. BNSF Rwy. Co. v. Tyrrell, ___ S. Ct. ___ (2017); Daimler AG v. Bauman, 134 S. Ct. 746 (2014).

• Fed. R. Civ. P. 24(a)(2); intervention as of right; standing. The Supreme Court held that an intervenor of right under Fed. R. Civ. P. 24(a)(2) must have Article III standing in order to pursue relief that is different from that which is sought by parties with standing. Town of Chester v. Laroe Estates, Inc., ___ S. Ct. ___ (2017).

• 28 U.S.C. §§1391 and 1400; venue in patent cases. The Supreme Court held that the later-modified general venue provisions in 28 U.S.C. §1391 did not modify the meaning of the patent-specific venue provision in 28 U.S.C. §1400, meaning that for purposes of venue in patent actions, a domestic corporation “resides” only in the state where it is incorporated. TC Heartland LLC v. Kraft Foods Group Brands LLC, ___ S. Ct. ___ (2017).

• Hague Service Convention; service by mail. Abrogating long-standing 8th Circuit law, the Supreme Court held that the Hague Service Convention permits service by mail so long as the receiving state does not object. Water Splash, Inc. v. Menon, ___ S. Ct. ___ (2017).

• Fed. R. Civ. P. 12(b)(6); documents considered in connection with motion; dissent. Affirming Judge Magnuson’s dismissal of TCPA claims following his consideration of redacted consent documents allegedly signed by the plaintiff, the 8th Circuit held that the consent documents could be considered where the documents were “embraced” by the complaint, and that any question regarding the documents’ authenticity was a “bogus” issue.

Dissenting, Judge Kelly argued that the authenticity of the consent documents was in “genuine dispute,” meaning that the motion to dismiss should have been converted to a motion for summary judgment. Zean v. Fairview Health Servs., ___ F.3d ___ (8th Cir. 2017).

• Voluntary dismissal; no abuse of discretion; absence of prejudice to defendants. The 8th Circuit found no abuse of discretion in a district court’s grant of a plaintiff’s request to dismiss his action without prejudice pursuant to Fed. R. Civ. P. 41(a) absent prejudice to the defendants or evidence of forum shopping.  However, it did find that the district court had abused its discretion by not considering whether the dismissal should be conditioned on the plaintiff’s payment of defendants’ costs and expenses.

Dissenting in part, Judge Gruender concluded that the district court had abused its discretion in failing to adequately address the forum shopping issue. Blaes v. Johnson & Johnson, ___ F.3d ___ (8th Cir. 2017).

• Action found untimely as a result of ECF errors. Judge Kyle granted the defendants’ motion to dismiss on the basis of the statute of limitations where plaintiff’s counsel attempted to file a timely complaint by ECF but failed to properly complete the ECF process, and rejected the plaintiff’s argument that her complaint should be “deemed” timely under the District’s ECF guidelines. Brinkman v. Nasseff Mech. Contractors Inc., ___ F. Supp. 3d ___, 2017 WL 1653255 (D. Minn. 5/2/2017).

• Recent decisions applying Spokeo. Denying the defendant’s motion to dismiss an FDCPA action, Judge Ericksen found that the plaintiff’s emotional distress was sufficient to confer standing under Spokeo. Bartl v. Enhanced Recovery Co., 2017 WL 1740152 (D. Minn. 5/3/2017).

Judge Schiltz denied a Spokeo-based motion to dismiss in a putative TCPA class action, finding that the plaintiff’s allegation that his business was disrupted, and paper and ink were wasted, were sufficient to establish standing. Sandusky Wellness Center, LLC v. MedTox Scientific, Inc., ___ F. Supp. 3d ___, 2017 WL 1483330 (D. Minn. 4/25/2017); Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016).

• Costs for supersedeas bond awarded. Where the losing defendants posted a supersedeas bond in conjunction with their appeal, subsequently prevailed in the 8th Circuit, and sought to recover the costs of the bond, Judge Nelson found that the 8th Circuit’s silence on the issue of bond-related costs did not preclude an award of those costs in the district court, and awarded the defendants more than $1.2 million in bond-related costs. Great Lakes Gas Trans. L.P. v. Essar Steel Minnesota, LLC, 2017 WL 2303502 (D. Minn. 5/26/2017).

• Motion to vacate arbitration award denied; partiality argument rejected. Denying a petition to vacate an arbitration award, Judge Magnuson rejected the petitioner’s argument that one arbitrator’s failure to disclose his involvement as a mediator in a prior action established “evident partiality.” Ploetz ex rel. Ploetz v. Morgan Stanley Smith Barney, LLC, 2017 WL 2303969 (D. Minn. 5/25/2017).

• 28 U.S.C. §1404(a); motion to transfer granted. After declining to rule on one defendant’s motion to dismiss for lack of personal jurisdiction, Judge Ericksen granted the defendants’ motions to transfer an action to the Northern District of Florida despite the fact that none of the parties resided there, where the action centered on an asphalt plant formerly located there, and where the relevant factors “overwhelmingly favor[ed]” transfer. KGM Contractors, Inc. v. Heavy Haulers, Inc., 2017 WL 2437239 (D. Minn. 6/5/2017).

Josh Jacobson

Law Office of Josh Jacobson 

 

INDIAN LAW
JUDICIAL LAW

• Sovereign immunity does not extend to tribal employees acting in their individual capacity. A driver employed by the Mohegan Tribal Gaming Authority caused a car accident while transporting casino patrons outside the tribe’s reservation. Although the tribe had waived its immunity from suit in the Mohegan Gaming Disputes Court, petitioners sued the tribal employee in state court on state tort theories. The employee argued that because he was acting within the scope of his employment, and the tribe had not waived its immunity from suit in state court, the tribe’s sovereign immunity protected him from the state-court suit. The district court rejected the sovereign-immunity defense, but the state Supreme Court reversed.

On review, the U.S. Supreme Court concluded that the employee could not rely on the tribe’s sovereign immunity. The Court explained that whether sovereign immunity is triggered rests on “whether the sovereign is the real party in interest.” In this case, the Court determined that the employee was the real party in interest because the tort suit was a suit against the employee in his individual capacity, not a suit against the employee in his official capacity. Although the employee argued that the tribe was the real party in interest because it indemnified the employee, the Court disagreed, reasoning that “[t]he critical inquiry is who may be legally bound by the court’s adverse judgment, not who will ultimately pick up the tab.” According to the Court, the indemnification clause could not “convert the suit against [the employee] into a suit against the sovereign.” Lewis v. Clarke, 137 S. Ct. 1285 (2017).

• District court made insufficient findings for termination of parental rights under ICWA and MIFPA. A Minnesota district court terminated the parental rights of the appellants, one of whom is a citizen of the Spirit Lake Nation. On appeal, the parents argued, inter alia, that the district court failed to find that their continued custody of the children was “likely to result in serious emotional or physical damage” to the children, a requirement for termination of parental rights under the Indian Child Welfare Act and the Minnesota Indian Family Preservation Act. The court of appeals agreed and remanded with instructions that the district court make this necessary finding before terminating parental rights. In re Welfare of Children of S.R.K., No. A16-2067, 2017 WL 2062137 (Minn. App. 5/15/2017).

Jessica Intermill 

Hogen Adams PLLC

Peter J. Rademacher

Hogen Adams PLLC

 

REAL PROPERTY
JUDICIAL LAW

• Mechanic’s liens. An ethanol plant with structural and mechanical deficiencies produced ethanol that produced significant quantities of a byproduct call thin stillage on a daily basis. After purchasing the plant by seller financing and paying the down payment, the plant owner arranged with a contractor to deliver the thin stillage to cattle farms as feed. The contractor assisted with the delivery and distribution of the thin stillage to the cattle farms. During the ongoing course of this work, the closing of the plant sale occurred and the seller recorded a mortgage for the balance of the purchase price. The contractor provided a mechanic’s lien waiver as part of the closing process and the thin stillage work continued unabated before and after the closing. The contractor eventually recorded a mechanic’s lien statement against the plant for unpaid work and the plant owner filed chapter 11 bankruptcy, where it was purchased by a new plant owner. In the foreclosure action to foreclose the mechanic’s lien, the district court held that the contractor facilitated an improvement to the real property by removing the thin stillage and that the mechanic’s lien was superior to the seller-mortgage because the work was continuous in nature and the seller-mortgagee had notice of the work before and after the closing.

The court of appeals reversed. The court of appeals noted that whether the removal of a byproduct generated from the operation of a business constitutes an improvement to real property under Minn. Stat. §514.01 is a case of first impression and that the parties agreed that the ongoing removal of the excess thin stillage was essential to the continued operation of the plant. However, the court of appeals noted that removal of a byproduct generated from a business was not one of the improvements listed in the mechanic’s lien statute. The court of appeals held that the byproduct removal did not constitute an improvement to the real property and was comparable to a hospital removing its hazardous waste or a restaurant removing its garbage from the premises. The fact that the high level of byproduct in this case was the result of the plant’s various operational malfunctions did not change the fact that the removal did not fall within one of the specific purposes of the mechanic’s lien statute and did not improve the real property’s value. M&G Services, Inc. v. Buffalo Lake Advanced Biofuels, LLC, __ N.W.2d __, 2017 WL 1375312 (Minn. Ct. App 2017).

• Truth In Lending Act. In 2006, the homeowners granted a mortgage on their home. In 2008, the homeowners stopped making the required monthly payments pursuant to the mortgage. In 2009, the homeowners sent the lender a notice of intent to rescind pursuant to the Truth In Lending Act (TILA). In 2010, the lender informed the homeowners there was no basis to rescind and the homeowners commenced suit. The district court granted summary judgment in favor of the lender on the grounds that the homeowner violated TILA’s statute of repose by not commencing an action within the three-year statutory period and the 8th Circuit affirmed. However, the Supreme Court held in another case that a homeowner under TILA only needed to deliver a notice of intent to rescind within the three-year period, not commence action. The Supreme Court therefore remanded and the 8th Circuit remanded to the district court. On remand, the homeowners argued they were entitled to rescission because they received only one copy of the right to rescind, not two copies as required by TILA, the disclosure documents contained inaccuracies, and the lender did not timely respond to their notice of intent to rescind.

The district court again granted summary judgment in favor of the lender, holding that the homeowners did not rebut the presumption in 15 U.S.C. §1635(c) that arose when the homeowners acknowledged in writing that they received the proper TILA disclosures, that the disclosures did not contain inaccuracies, and the lender was not required to respond to the notice of intent to rescind because there was no TILA violation. The 8th Circuit affirmed. The 8th Circuit held that conclusory denials of receipt of the TILA disclosures, unaccompanied by details or other evidence supporting the denial, is insufficient to rebut the presumption of delivery created by 15 U.S.C. §1635(c). Conclusory self-serving affidavits created eight years after the closing will not defeat an otherwise valid summary judgment motion. As for the allegation of inaccuracies on the disclosure statement, the 8th Circuit held that the argument was waived, as it was being raised for the first time on appeal. The 8th Circuit went on to hold that even if the argument were not waived, it would fail because hazard insurance premiums are not one of the charges required by TILA and the alleged mistake was that it was listed as higher than the correct amount, not lower. Without the hazard insurance amount, the alleged inaccuracies fell below the one-half of 1 percent threshold differential required by TILA. As to the claim that the lender did not timely respond to the homeowners’ TILA request, the 8th Circuit held that the claim was entirely dependent on whether a TILA disclosure violation occurred. Because there was no TILA disclosure violation, the right to rescind expired three days after the closing and the claim is, therefore, without merit. Keiran v. Home Capital, Inc., __ F.3d ___, 2017 WL 2381115 (8th Cir. 2017).

Michael Kreun

Beisel & Dunlevy PA

TAX
JUDICIAL LAW

• IRS exceeded authority in issuing PTINS; potential for refunds. In a class action challenging the authority of the IRS to issue and collect fees for Preparer Tax Identification Numbers (PTINS), a D.C. circuit court ruled that the IRS was permitted to issue the numbers, but exceeded its authority in collecting fees for PTINS. The IRS, like other agencies, is limited by statute in the fees it can charge. It is permitted to charge fees only for a “service or thing of value,” which, the court concluded, PTINS are not. See 31 U.S.C. §9701(b) (providing that agencies “may prescribe regulations establishing the charge for a service or thing of value provided by the agency.”). As a result of the court’s order, the IRS suspended the PTIN registration and renewal system. But see Brannen v. United States, 682 F.3d 1316, 1319 (11th Cir. 2012) (holding that the PTIN user fees are permissible under Section 9701: “[A] tax return preparer cannot prepare tax returns for others for compensation without having the required identifying number. And because §6109(a)(4) expressly authorizes the Secretary to assign such numbers, a person cannot prepare tax returns for another for compensation unless that person obtains from the Secretary the required identifying number. For this reason, when the Secretary assigns the identifying number (the preparer tax identification number or ‘PTIN’), the Secretary is conferring a special benefit upon the recipient, i.e., the privilege of preparing tax returns for others for compensation.”) Steele v. United States, 14-CV-1523-RCL, 2017 WL 2392425 (D.C. Cir. 6/1/2017).

• Statute of limitations extension not invalid because of mere allegation of conflict of interest or alleged duress. The 9th Circuit held in this case that a third party’s alleged conflict of interest does not vitiate consent to an otherwise valid extension of the statute of limitations. The underlying dispute involved an “elaborate tax sheltering scheme” developed and marketed by KPMG that resulted in various criminal indictments and convictions. The IRS determined that the underlying transactions—called BLIPS (Bond Linked Issue Premium Structure)—were tax shelters and the Service began auditing personal tax returns that claimed BLIPS losses. An individual investor, Tom Gonzales, and his single-member LLC participated in BLIPS through another entity, the Logan Strategic Investment Fund. Yet another entity, Presidio, was Logan’s tax matters partner. Presidio was formed by several KPMG employees who left to form the investment advisory firm. Presidio offered the BLIPS tax shelter to its clients. Logan filed its 2000 partnership tax return on 4/16/2001; the IRS therefore had until 4/16/2004 to assess any taxes with respect to that return. Both Logan and Mr. Gonzales personally signed consents to extensions on 12/2/2003 and 10/20/2004 that extended the limitations period to 6/20/2005. The IRS issued a Final Partnership Administration Adjustment on 4/28/2005, after the initial limitations period expired but within the extension granted by the consents. Despite signing the extensions himself, Mr. Gonzales argued that the extensions were invalid. Gonzales set forth two reasons why the consents should not be binding on him. He argued that his tax advisor had a conflict of interest and further that Gonzales signed the extensions under duress.

The court rejected both arguments. Addressing the first argument, the court was not persuaded that the mere fact that Gonzales’s tax accountant and advisor was instrumental in selling the tax shelter, received a commission for the sale, and signed the return amounted to sufficient reason to vitiate the extension, which was signed by Gonzales himself. Characterizing these facts as a “vague implication of wrongdoing,” the court made short work of this argument. The court similarly rejected Gonzales’s duress argument. Duress in the tax context is an “action by one party which deprives another of his freedom of will to do or not to do a specific act.” Gonzales provided no evidence of duress. The IRS pursuing an audit and/or properly serving a summons cannot amount to duress. Twenty-Two Strategic Investment Funds v. United States, No. 15-15551, 2017 Wl 2453781, __ F.3d __ (9th Cir. 2017).

• A waiver is a waiver is a waiver: Tax court holds whistleblower who agreed not to seek judicial review of monetary award does not have right to judicial review of monetary award. A whistleblower was awarded $2,135,826 after the IRS successfully recovered nearly $15 million based on information the whistleblower provided. The award would have been a bit more, except at the time of the award, the IRS was faced with a mandatory “sequester” imposed by the Budget Control Act of 2011. The IRS reduced the award by 7.3% according to the Service’s understanding of what was required of it under the 2011 Act. The whistleblower accepted this award, and in exchange for prompt payment, waived his judicial appeal rights by checking a box providing that “I agree with the preliminary award recommendation… I waive all of my administrative and judicial appeal rights with respect to the award determination, including my right to petition the United States Tax Court.” Applying principles of contract law, the tax court held that the whistleblower’s agreement with the Service bound the whistleblower and precluded a challenge to the amount of the award in the tax court. Whistleblower 4496-15W v. Comm’r of Internal Revenue, No. 4496-15W, 2017 WL 2304309 (T.C. 5/25/2017).

• Unless the slots are your job, deductions are limited. Ordinarily, gambling losses can be deducted only to the extent of gambling winnings. Minn. Stat. §290.01, subd. 19. They are fully deductible, however, when the taxpayer gambles as a trade or business. Minn. Stat. §290.091, subd. 2(a)(l)-(2). Barrett is a self-employed computer programmer. But in 2010, doing business as WCB Gaming, Barrett created an internet website to showcase his slot-machine gaming strategies. The tax court considered the IRS’s nonexclusive factors to determine whether Barrett’s activity amounted to a trade or business (as outlined in Treas. Reg. §1.183-2(b), and the United States Supreme Court case Commissioner v. Groetzinger, 480 U.S. 23 (U.S. 1986)).

First considering the IRS list, the tax court determined that several factors indicate Barrett’s activities were not a business or trade. First, Barrett failed to maintain complete or accurate books and records of his gambling activities. Second, Barrett failed to conduct the activity in a business-like manner by failing to investigate advertising or other operations to become profitable and failing to conduct the gambling activities similarly to his computer consulting business. Third, Barrett did not expect that his gambling would be profitable or that his website would become valuable. Fourth, his strategies and techniques were neither new nor superior. Finally, Barrett did not depend on income from gambling activity to live on, but rather the activity was for personal pleasure or recreation. Next, the tax court addressed the factors set forth in the Groetzinger case. The United States Supreme Court held that gambling activity is considered a business or trade if it: is pursued full time, in good faith, and with regularity; produced income for a livelihood; and is not a mere hobby. Barrett did not intend for his winnings to support his livelihood, nor did he devote a full-time work schedule to the activity. After considering the facts and circumstances under each test, the tax court ruled that Barrett was unable to claim the full extent of his gambling losses as a trade or business. Barrett v. Comm’r, No. 8840-R (Minn. T.C. 4/24/2017).

• Property tax: Parking lot assessment adjusted. Petitioners challenged the assessed market value of a parking ramp in Minneapolis for the purpose of imposed property taxes. The Hennepin County Assessor valued the property at $8,429,800 as of 1/2/2014, and $9,323,200 as of 1/2/2015. In valuing real property, the tax court considers both the use that should be made of an improved property in light of the existing improvements and the ideal improvement if the property were already vacant (i.e., the “highest and best use”). Appraisal Institute, The Appraisal of Real Estate 345 (14th ed. 2013). The court held that the highest and best use of the subject property is as it is currently used, as a parking ramp.

Property value can be determined by considering three traditional approaches to valuation: cost, sales, and income comparison. Equitable Life Assur. Soc’y of U.S. v. Ramsey Co., 530 N.W.2d 544, 552 (Minn. 1995). In this dispute, the court did not utilize a cost approach valuation due to the age of the structure and the difficulty in accurately estimating depreciation. The court also declined to utilize the sales comparison approach because none of the parties’ proposed properties were adequately comparable to the subject property. The court was left with the income approach to determine property value. The income approach to valuation is based on the present value of future rights to income generated by a property, determined by capitalizing anticipated rents generated by the property at market rates, less expenses of the property at market rates. Macy’s Retail Holdings v. Hennepin Co., Nos. 27-CV-07-07774 et al. (Minn. T.C. 11/28/2011). Here, the tax court employed before-tax capitalization rates of 7.00% as of 1/2/2014, and 6.75% as of 1/2/2015, and adjusted each downward by the effective tax rate of 4.22%. Therefore, the court decreased the fee-simple value of the property to $6,510,500 as of 1/2/2014, and $7,325,500 as of 1/2/2015. Court Park Co. et al. v. Hennepin Co., 27-CV-16-03818 (Minn. T.C. 5/ 3/2017).

• Property tax: Tax court revisits valuation of ethanol production facility. The Minnesota Supreme Court remanded this case to the tax court to decide the issue of economic obsolescence. 868 N.W.2d 253 (Minn. 2015). On remand, the tax court concluded that its initial measure of economic obsolescence excess production capacity was not supported by the record. No. 81-CV-10-365 et al., 2016 WL 5874449 (9/28/16). Guardian Energy appealed. The Minnesota Supreme Court stayed its proceedings to allow the tax court to address Waseca County’s motion for amended findings of fact and conclusions of law. At issue is the value of Guardian’s ethanol production facility near Janesville in rural Waseca County as of 1/2/2009, 1/2/2010, and 1/2/2011. There are three commonly used approaches to determining market value of real property: sales-comparison, cost, or income-capitalization. When the property to be valued is a special-purpose property, application of the sales-comparison and income-capitalization approaches can be difficult. As a result, special-purpose properties are often valued under the cost approach alone. This method uses the current cost of constructing the existing improvements on the property, subtracts depreciation, and then adds the value of the land. One form of depreciation that is subtracted from the value is economic obsolescence. The Minnesota Supreme Court instructed the tax court to restrict its analysis to economic obsolescence as outlined by the parties’ respective appraisers instead of applying its own approach. The tax court adopted Guardian Energy’s appraiser’s approach, but recalculated the tax liability based on the information on record. After recalculation, the tax court determined both parties’ appraisers undervalued the property for all three years and assessed a new value on the subject property for each year at issue. Guardian Energy v. Waseca Co., T.C. No. 81-CV-11-741 (Minn. T.C. 5/16/2017).

• Property tax: Permission to continue without payment denied. Marshall Square Shopping Center filed a Petition for Permission to Continue Prosecution without Payment of Ad Valorem Property Taxes subject to Minn. Stat. §278.01. The statute requires the petitioner to pay the county treasurer 50 percent of the tax levied for such year against the property involved, unless upon a motion the petitioner shows: 1) the request is made in good faith, 2) there is probable cause to believe the property is exempt from the tax or the tax may be determined to be less than 50 percent of the amount levied, and 3) it would pose an undue hardship upon the petitioner to pay the taxes. Marshall Square Shopping Center alleges that the actual market value of the subject property as of 1/2/2016 was less than half its assessed value, citing a leased-fee appraisal of the subject property as of 5/13/2016, prepared for CorTrust Bank. However, the court denied the motion for lack of subject matter jurisdiction because the petitioner failed to serve the Lyon County Attorney or the Lyon County Auditor within the timeframe provided under Minn. Stat. §278.03. Marshall Square Shopping Center v. Lyon Co., No. 42-CV-17-478 (Minn. Tax 5/17/2017).

• Property tax: Order amending findings of fact and conclusions of law. The market value of a multi-tenant retail shopping center in Hastings drives this long-running property tax dispute. The tax court’s original order for judgment was entered in November 2014 and the taxpayer appealed to the Minnesota Supreme Court. The reviewing court affirmed in part and remanded for further proceedings. Following remand, the tax court held an evidentiary hearing and issued its decision on remand in late December 2016. Both parties moved for amended findings of fact and conclusions of law, which brings us to the instant Order. KCP and the county both requested relief from the order, but before the court could address the merits of the parties’ requests, it first addressed KCP’s failure to timely notify the county of KCP’s motion. The county contended that because KCP had not served a notice of motion to the county as required by Minn. R. Civ. P. 7.02, KCP’s motion for amended findings should be dismissed. Following considered analysis, the court disagreed; it concluded that because the county was not prejudiced by KCP’s procedural error, the court was not prohibited from hearing or deciding KCP’s motion. The court then turned to the merits of the motions. The court granted KCP’s motion in part and adjusted one terminal cap rate. The county’s motion requested that the tax court amend its findings of fact to show the various calculations performed in the court’s discounted-cash-flow approach. The tax court agreed with the county and, based on agreement of the parties at the argument on the motion, the court amended the finding of facts to provide information about factors applied to the discounted-cash-flow approach. KCP Hastings, LLC v. Dakota Co., No. 19HA-CV-11-2713, 2017 WL 1750381 (Minn. T.C. 4/27/2017)

LOOKING AHEAD

• Kansas reverses (tax) course: Overriding gubernatorial veto, state will raise income taxes by $1.2 billion over two years. The Republican-controlled Kansas Legislature overrode Gov. Sam Brownback’s veto and eliminated significant portions of the state’s 2012 tax cuts to address both a growing budget deficit and a Kansas State Supreme Court order holding that K-12 funding under the prior taxing scheme was constitutionally infirm. Gannon v. Kansas, 390 P.3d 461 (Kansas 2017) (addressing first justiciability questions and holding that the state’s education financing system failed to comply with adequacy requirement of state constitutional education article). Under the new tax provisions, Kansas will eliminate income tax exemptions that the 2012 law had awarded to lawyers, farmers, doctors, and owners of 330,000 businesses; it will return to a three-tier personal income tax model; and finally, the state will boost marginal rates for all tiers, with the highest marginal rate topping out at 5.7%. The 2012 tax cuts have been referenced widely as an experiment and example for conservative lawmakers in other states.

Morgan Holcomb

Mitchell Hamline School of Law

Jessica Dahlberg

Grant Thornton

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