◘ Arson: First-degree arson does not require proof that the defendant acted “unlawfully.” At his trial for first-degree arson, appellant’s daughter testified she accidentally started the fire that burned down appellant’s house. However, the state’s expert testified the fire was intentionally set in three places. A jury convicted appellant, and he requests a new trial on appeal, arguing the state did not prove he acted “unlawfully” when he set fire to his home.
Minn. Stat. §609.561, subd. 1, states that “[w]hoever unlawfully by means of fire or explosives, intentionally destroys or damages any building that is used as a dwelling at the time the act is committed… commits arson in the first degree.” Based on the statute’s plain language, the court of appeals finds that “unlawfully” means “without authorization,” or without the license, permit, or written permission described in Minn. Stat. 609.564, which states that a person who sets a fire with such permission from the fire department does not commit arson. This interpretation is supported by the structure of the arson statute and by the common meaning of “unlawful.”
However, the court holds that the state is not required to prove a defendant acted without this authorization as a separate element of an arson offense. Instead, because acts of arson are “ordinarily dangerous to society,” the court determines that “unlawfully” in the arson statute presents an exception to liability, not an element of arson. The burden of proving that exception falls on the defendant. The court concludes there is sufficient evidence to support appellant’s conviction, as the state proved he intentionally burned down his home and appellant did not show that he was permitted to do so. The court of appeals also affirms the district court’s decision to deny appellant’s request for a durational departure and the district court’s award of restitution. But the case is nonetheless remanded for resentencing, as appellant’s sentence was based on an incorrectly calculated criminal history score. State v. Beganovic, 947 N.W.2d 278 (Minn. Ct. App. 4/11/2022).
◘ Trespass: Oral declaration of trespass and refused written notice do not satisfy trespass notice requirement. Police responded to a grocery store on a report of unwelcome youth refusing to leave. When police dispersed the group, an officer tried to hand appellant a written notice ordering appellant to leave and not return, but appellant refused to take the notice. Another officer told appellant, “You’re officially trespassed…” Appellant left but returned to the store two months later. He was charged with criminal trespass and adjudication of his delinquency petition was stayed for 180 days following a bench trial.
Minn. Stat. §609.605, subd. 1(b)(8), makes it a misdemeanor for a person to intentionally return to a property, unless the person has a claim of right to the property or consent to be there, “within one year after being told to leave the property and not to return.” The Minnesota Court of Appeals finds first that the officer’s statement that appellant was “officially trespassed” did not satisfy the statute’s notice requirement. There is no definition of “trespass” or case law that indicates “officially trespassed” means the person is ordered to leave the property and not reenter for one year. The officer’s declaration was not specific enough to inform appellant of his duty to leave and not return.
The court also finds insufficient the written notice that appellant refused. The court looks to dictionary definitions of “told,” holding that one cannot be found to have criminally trespassed unless he was actually informed of his obligation to leave and not return. An attempt to so inform him is not enough. The district court’s finding of guilt and stay of adjudication is reversed. Matter of Welfare of A.A.D., Jr., No. A21-1264, 2022 WL 2124583 (Minn. Ct. App. 6/13/2022).
◘ Right to unanimous verdict: Omission of one juror’s jury polling response does not establish violation of right to unanimous 12-member jury. After a jury trial, Appellant was found guilty of burglary and assault. Appellant requested a poll of the jury. The transcript records the clerk questioning 11 jurors, who responded that they supported the verdicts. The court then stated, “I think that’s everyone.” Appellant did not object. On appeal, appellant argues his right to a unanimous 12-member jury was violated, because only 11 jurors found him guilty. The court of appeals affirmed appellant’s convictions.
The 14th Amendment to the U.S. Constitution requires all criminal jury verdicts to be unanimous, and the 6th Amendment to the Minnesota Constitution requires all felony juries to have 12 members. A defendant may request a poll of the jury after a verdict is announced. As a matter of first impression, the Supreme Court considers whether proper polling of the jury is necessary to protect a defendant’s right to a unanimous verdict from a 12-member jury or if polling is simply one mechanism to ensure a defendant’s rights are respected. The Court follows the majority of other courts to consider this issue and holds that “jury polling is but one mechanism to ensure a unanimous jury verdict, such that an error in polling the jury does not categorically create a violation of the constitutional right to a unanimous jury.” The right to poll a jury is not included in the Constitution, as it originated in common law to protect constitutional rights. It is also optional.
Here, there was an error in the jury polling, but other safeguards were in place to protect appellant’s right to a unanimous 12-person jury. The record shows 14 were originally seated and that two were dismissed during and after the trial. After the trial, the jury immediately began deliberations and returned verdicts shortly thereafter. The jurors were never sent home or had an opportunity to leave. No one present commented on any missing jurors. The jury was also twice instructed on their duty to reach a unanimous verdict. The jurors were asked as a group, prior to polling, if they agreed with the verdicts and no one objected. Thus, the record contains substantial evidence that the jury was properly constituted and acted unanimously.
The Court denies appellant any relief for the polling error, as the error was not structural and appellant did not establish a reasonable likelihood that the jury would have reached a different result had the twelfth juror been polled. State v. Bey, A20-1097, 2022 WL 2137007 (Minn. Sup. Ct. 6/15/2022).
n Sexually dangerous persons: Mandatory conditional release period for persons civilly committed as sexually dangerous and convicted of assaulting treatment facility employee does not violate equal protection. Appellant was previously civilly committed as a sexually dangerous person (SDP). He later pleaded guilty to fourth-degree assault for punching a security counselor in the head at the secure treatment facility. As part of appellant’s sentence, the district court imposed a mandatory five-year conditional release term under Minn. Stat. §609.2231, subd. 3a(e). The district court denied appellant’s petition for postconviction relief, in which he argued the conditional release period violates equal protection, because the conditional release period is imposed on persons convicted under section 609.2231, subd. 3a(b)(1) (assaulting a secure treatment facility employee while civilly committed as SDP), but not those convicted under section 609.2231, subd. 3a(c)(1) (assaulting a secure treatment facility employee while civilly committed as mentally ill and dangerous (MID)). The court of appeals affirmed, finding individuals convicted under subd. 3a(b)(1) and 3a(c)(1) are not similarly situated.
The threshold question for equal protection analysis is whether the claimant is similarly situated in all relevant respects to others who they claim are being treated differently. If the claimant is not treated differently from others similarly situated, there is no equal protection violation. The Supreme Court examines which similarities are relevant in this case—the penalized conduct or the broader characteristics of the two groups as a whole. The Court agrees with appellant that, notwithstanding the different statutory classifications as SDP versus MID, appellant is similarly situated to MID persons convicted under subd. 3a(c)(1), because the penalized conduct is the same under both subds. 3a(b)(1) and 3a(c)(1). The two subdivisions prohibit the same conduct in identical language, regardless of commitment status.
Next, because appellant’s challenges does not implicate a fundamental right or involve a suspect class, the Court considers whether the sentencing disparity between SDP and MID patients under subds. 3a(b)(1) and 3a(c)(1) is a rational means of achieving the Legislature’s policy goal. The purpose of both subdivisions is to protect treatment facility staff, a legitimate policy goal. Legislative committee discussions show legislators found the possibility of a five-year conditional release term would be more effective in deterring SDP patients, who do not necessarily suffer from disorders that prevent them from understanding the consequences of their actions, than MID patients from the same behavior. The Court finds this is an adequate justification for the disparate sentences under subds. 3a(b)(1) and 3a(c)(1). Appellant’s equal protection rights were not violated. State v. Lee, A20-0758, 2022 WL 2232339 (Minn. Sup. Ct. 6/22/2022).
Bruno Law PLLC
Bruno Law PLLC
Employment & Labor Law
◘ Workers’ compensation; exposure to noise covered. An employee whose job included monitoring workplace noise levels was entitled to workers’ compensation benefits due to exposure to hazardous noise, which was deemed a “significant contributing factor” in the development of his hearing loss. The Minnesota Supreme Court, partially upholding a decision of the Workers’ Compensation Court of Appeals, held that there was sufficient evidence that the employee sustained occupation disease for which compensation was required, and the court properly ordered payment of medical benefits by the employer, by whom the employee was most recently exposed to the hazard. But the Court overruled the compensation judge in determining that all issues other than medical benefits were moot and remanded for determination whether the “last-exposure employer” was entitled to reimbursement from the “last significant exposure employer” under Minn. Stat. §176.12, subd. 5 and Minn. Stat. §176.66, subd. 10. Sershen v. Metropolitan Council, 2022 WL 1482048 (Minn. App. 05/11/2022) (unpublished).
◘ Unemployment compensation; home health aide denied benefits. A home health care aide who replaced narcotics in a cabinet without recording that they had been received and on several other occasions recorded administering medication when she had not done so, was not entitled to unemployment compensation benefits. Affirming the decision of an unemployment law judge (ULJ) with the Department of Employment & Economic Developments (DEED), the court of appeals held that the employee violated the employer’s policies, which constituted “disqualifying misconduct.” Erickson v. Legacy of Delano, LLC, 2022 WL 1210259 (Minn. Ct. App. 04/25/2022) (unpublished).
◘ Unemployment compensation; five cases address various issues. A quintet of cases recently decided by the Minnesota Court of Appeals addressed a variety of unemployment compensation issues. As usual the employees lost most of them, but managed to prevail in one.
An employee who quit his grocery distributor job because his schedule conflicted with day care needs was denied unemployment compensation benefits. The employee failed to satisfy any of the statutory provisions that would entitle him to unemployment benefits after quitting the job. Toenjes v. SpartanNash Associates, LLC, 2022 WL 1531672 (Minn. Ct. App. 05/16/2022) (unpublished).
A supermarket employee who was fired because he made inappropriate comments to coworkers and harassed and offended customers was denied unemployment compensation benefits. The unemployment law judge (ULJ) adequately addressed all nine of the grounds raised by the employee upon a request for reconsideration after initially denying his claim. Kuller v. Super Valu, 2022 WL 1533906 (Minn. Ct. App. 05/16/2022) (unpublished).
A hair stylist who quit her job was denied unemployment compensation benefits because she did not resign due to a “good” reason caused by the employer. The failure to satisfy the statutory requirements of Minn. Stat. §268.095 barred her claim. McDuff v. Half Moon Clippers, 2022 WL 1531364 (Minn. Ct. App. 05/16/2022) (unpublished).
Receipt of Social Security retirement benefits was properly deducted from an employee’s unemployment compensation benefits. The ULJ correctly ruled that the payment constituted a set-off from any unemployment compensation benefits under Minn. Stat. §268.085, subd. 4. Powers-Potter v. Data Recognition Corp., 2022 WL 1532131 (Minn. Ct. App. 05/16/2022) (unpublished).
An employee who filed an appeal from an initial determination of ineligibility 13 days late, nearly two weeks after the 20-day deadline, was granted leniency by the appellate court and allowed to proceed and re-open his case. The ULJ did not adequately consider whether the employee, who claimed he was late due to problems with the English language and difficulty finding a translator, satisfied the “substantial compliance” requirement establishd by In Re Murack, 957 N.W.2d 124 (Minn. Ct. App. 2021), which came on the heels of an executive order by Gov. Walz extending the time for unemployment compensation appeals. Victoria v. Long Prairie Packing, 2022 WL 1531545 (Minn. Ct. App. 05/16/2022) (unpublished).
Marshall H. Tanick
Meyer, Njus & Tanick
◘ U.S. Supreme Court limits EPA’s ability to regulate power plant emissions under the Clean Air Act. On June 30, 2022, the Supreme Court of the United States issued a decision in West Virginia v. EPA, holding that the “major questions” doctrine limits the authority of the Environmental Protection Agency (EPA) to regulate greenhouse gas emissions under the Clean Air Act (CAA).
The case involved the EPA’s 2015 Clean Power Plan (CPP) rule, which established the first-ever performance standards for carbon dioxide (CO2) emissions from existing power plants in the United States under section 111(d) of the CAA, 42 U.S.C. 7411 (d). At the time, then-President Obama described the CPP as the administration’s “biggest step yet to combat climate change”; the rule aimed to reduce carbon emissions from existing power plants by over 30% compared to 2005 levels.
Under section 111 of the Act, performance standards for pollutants such as CO2 must be based upon the degree of emission limitation achievable through the application of the “best system of emission reduction” (BSER). 42 U.S.C. 7411 (a)(1). In the CPP, EPA identified four broad “building blocks” that together constitute BSER for CO2 at existing power plants: making plants more efficient, increasing the use of low-carbon power sources such as natural gas, using more low-carbon power sources (e.g., solar, wind), and increasing energy efficiency. On the basis of these BSER building blocks, the CPP established CO2 emission performance rates for two subcategories of affected electric generating units (EGUs)—fossil fuel-fired electric utility steam generating units and stationary combustion turbines. The rule then set state-specific CO2 goals, expressed as both emission rates and as mass, that reflect the subcategory-specific CO2 emission performance rates and each state’s mix of affected EGUs subject to the two performance rates. States had discretion to determine the methods they would use to comply with the CO2 goals, which could include emissions credit trading between sources or even between states. Finally, the rule provided guidelines for the development, submittal, and implementation of state plans that implement the BSER emission performance rates either through emission standards for affected EGUs, or through measures that achieve the equivalent of those rates. The final rule provided up to 15 years for full implementation of all emission reduction measures. The CPP’s performance rates, by EPA’s own admission, were so strict that no existing coal plant would be able to comply without undertaking one of the CPP’s means of “generation shifting,” i.e., moving from coal to natural gas, solar, or wind. EPA projected that this would impose billions in compliance costs and require the retirement of many coal plants.
The CPP has yet to come into effect. It was immediately challenged by numerous states and private parties and eventually stayed by the Supreme Court in February 2016. Notably, as Justice Kagan explained in her dissent in the current decision, “[m]arket forces alone caused the power industry to meet the Plan’s nationwide emissions target—through exactly the kinds of generation shifting the Plan contemplated.” As a result, Justice Kagan continued, the CPP “had become, as a practical matter, obsolete.” Nonetheless, the EPA under the Trump administration rescinded the CPP in 2019 and replaced it with the less stringent Affordable Care Energy (ACE) rule. In the ACE rule, EPA decided the BSER would be based upon building block one of the CPP, i.e., a combination of equipment upgrades and other “inside the fence-line” operating practices that would improve facilities’ heat rates, and not upon the generation-shifting mandates of blocks 2 and 3 of the CPP.
Numerous states and private parties challenged EPA’s repeal of the CPP and promulgation of the ACE rule in the D.C. Circuit court of appeals. The D.C. Circuit vacated EPA’s repeal of the CPP and its promulgation of the ACE rule, holding that EPA erred by determining power generation shifting cannot constitute a “system of emission reduction” under Section 111. Am. Lung Ass’n v. EPA, 985 F.3d 914, 995 (D.C. Cir. 2021). Subsequently, upon an unopposed motion by the EPA under the new Biden administration, the D.C. Circuit stayed its vacatur of EPA’s repeal of the CPP while the EPA evaluated whether to promulgate a new Section 111(d) rule. The Supreme Court then granted petitions for certiorari from West Virginia and several other Republican-led states. In the interim, the EPA announced that it planned to pursue different climate regulations and would not be reinstating the CPP.
Writing for a 6-3 majority of the court, Chief Justice Roberts held that EPA lacked clear congressional authority to pass the CPP. The decision first addressed the government’s arguments that the petitioner states did not have standing, given that the CPP never went into effect and that EPA stated it will not enforce the CPP but will instead pursue new climate regulations. The Supreme Court was not convinced. Because the D.C. Circuit had vacated the ACE rule and the ACE’s rule’s repeal of the CPP, the D.C. Circuit’s decision effectively reinstated the CPP. The CPP “injures” the petitioning states, the Court held, because it requires them to regulate power plant emissions more stringently, and a “favorable ruling” from the Supreme Court would “redress” the injury. Accordingly, petitioners met the requisite standing elements. The Court posited that the government argument was in fact based on mootness, not standing. But to establish mootness, the Court held, the government bore the burden “to establish that a once-live case has become moot.” Here, the EPA’s statements that it did not intend to enforce the CPP were insufficient, the Court held; “voluntary cessation does not moot a case unless it is absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur” (citations omitted).
Turning to the merits, Justice Roberts framed the issue as follows: “whether restructuring the Nation’s overall mix of electricity generation, to transition from 38% to 27% coal by 2030, can be the BSER within the meaning of Section 111.” The answer, the Court held, is no. The Court reached its decision largely in reliance upon the “major questions doctrine,” which Justice Roberts described as follows: “[O]ur precedent teaches that there are extraordinary cases that call for a different approach—cases in which the history and the breadth of the authority that the agency has asserted, and the economic and political significance of that assertion, provide a reason to hesitate before concluding that Congress meant to confer such authority.” (Citations omitted.) In such cases, the Court held, “given both separation of powers principles and a practical understanding of legislative intent, the agency must point to clear congressional authorization for the authority it claims.” “Extraordinary grants of regulatory authority are rarely accomplished through modest words, vague terms, or subtle devices.” (Citations omitted.) The major questions doctrine, Justice Roberts explained, addresses a recurring problem: “agencies asserting highly consequential power beyond what Congress could reasonably be understood to have granted.”
In this case, the Court held that the vague language of CAA Section 111—authorizing EPA to determine “the degree of emission limitation achievable through the application of the best system of emission reduction (emphasis added)—did not provide the “clear congressional authorization” necessary to justify the “transformative expansion” of regulatory authority EPA claimed as the basis for the CPP’s sweeping change in the nation’s mix of methods of energy generation. The Court stated that its decision was supported by the fact that Congress had “conspicuously and repeatedly” declined to adopt the type of regulatory program established by the CPP. In addition, the Court noted that EPA’s interpretation of Section 111(d) was inconsistent with the agency’s prior use of the statute, which had been rare and limited to “measures that would reduce pollution by causing the regulated source to operate more cleanly.” In reversing the D.C. Circuit, Justice Roberts conceded that “[c]apping carbon dioxide emissions at a level that will force a nationwide transition away from the use of coal to generate electricity may be a sensible solution to the crisis of the day.” (Citations omitted.) However, he continued, “it is not plausible that Congress gave EPA the authority to adopt on its own such a regulatory scheme in Section 111(d). A decision of such magnitude and consequence rests with Congress itself, or an agency acting pursuant to a clear delegation from that representative body.”
Justice Kagan, in a dissent joined by Justices Breyer and Sotomayor, sharply disagreed with the majority, criticizing the court for stripping EPA of “the power Congress gave it to respond to the most pressing environmental challenge of our time.” (Citations omitted.) The regulation of climate change, Justice Kagan wrote, falls squarely within the scope of Section 111, which authorizes EPA to regulate stationary sources of any substance that “causes, or contributes significantly to, air pollution” and that “may reasonably be anticipated to endanger public health or welfare.” Justice Kagan also criticized the majority’s narrow reading of reading of the key language “best system of emission reduction” for power plants in section 111(a)(1). “Best system,” she argued, is an intentionally broad delegation of power, designed to allow EPA to “respond, appropriately and commensurately, to new and big problems.” And, she continued, “the parties do not dispute that generation shifting is indeed the ‘best system’… to reduce power plants’ carbon dioxide emissions.” Finally, Justice Kagan called into question what may be the most consequential aspect of the majority opinion: “It announces the arrival of the ‘major questions doctrine,’ which replaces normal text-in-context statutory interpretation with some tougher-to-satisfy set of rules.” The prior decisions relied upon by the majority, she argued, were decided within the context of the Court’s normal approach to interpreting agency claims to statutory authority, which is often rooted in the principles of agency deference outlined in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 468 U.S. 837 (1984), and there was no need for the Court to go beyond these principles. By doing so, Justice Kagan continued, the Court has now created a two-step inquiry: “First, a court must decide, by looking at some panoply of factors, whether agency action presents an ‘extraordinary case.’ If it does, the agency ‘must point to clear congressional authorization for the power it claims,’ someplace over and above the normal statutory basis we require.” (Citations omitted.)
Exactly how this new “two-step” process will be applied by federal courts remains to be seen. However, there is little doubt that the Supreme Court’s decision in this case will have ramifications far beyond limiting EPA’s ability to regulate climate change under Section 111(d) of the Clean Air Act. West Virginia v. EPA, ___ U.S. ___ (2022).
◘ Minnesota Court of Appeals rules against the MPCA in favor of city wastewater treatment facility. In May the Minnesota Court of Appeals ruled in favor of the City of Osakis Wastewater Treatment Facility in its challenge to MPCA’s reissuance of the facility’s NPDES permit, as well as to MPCA’s denial of a contested case hearing on the permit. The lower court’s decision was reversed and remanded for reconsideration and for a contested case hearing.
The case involved the MPCA’s lake eutrophication standards. Eutrophication is the excess nutrient loading to water bodies caused by human sources and activities. On the basis of these standards, the MPCA set a total phosphorus limit in its reissuance of an NPDES permit to the city that was lower than the limit requested by the city.
The court found that the MPCA misinterpreted the state and federal rules applicable to determining the total phosphorus limit in the permit. Despite the substantial deference and assumption of correctness given to agency decisions, the court looked only to the language of the rules because they were “clear and capable of understanding” and did not require the court to defer to the agency’s interpretation.
Thus, the court found that MPCA made an error in its issuance of the NPDES permit because it relied on only one of three variables of the lake-eutrophication standards in finding a basis for its phosphorus limit. Instead, the MPCA should have also considered at least one of the other two variables. It was not enough to use phosphorus as the basis for finding that lake eutrophication standards would be exceeded—the MPCA also would have to had to find that the chlorophyll-a or Secchi disk transparency standards would be exceeded. This error meant that the MPCA was not able to prove there was substantial evidence in the record to support its phosphorus limit.
MPCA’s additional attempts to justify its phosphorus limit failed as well. The documents in the administrative records used to support the limit did not do what the MPCA contended—they did not support the conclusion that the city’s wastewater treatment facility would have a reasonable potential to cause or contribute to a violation of state lake-eutrophication standards.
On the issue of the contested case hearing, the court found that because there was not substantial evidence in the record supporting the total phosphorus limit, there was not a reasonable basis for denying the request for a hearing. In addition, the MPCA’s explanations were conclusory, did not discuss the evidence in detail, and did not “explain with specificity why a contested-case hearing would not be appropriate.” In re A Contested Case Hearing Request & Reissuance of Nat’l Pollutant Discharge Elimination Sys., No. A21-0986, 2022 Minn. App. Unpub. LEXIS 269 (05/02/2022).
Jeremy P. Greenhouse
Fredrikson & Byron, P.A.
Vermont Law School, 2015
Fredrikson & Byron, P.A.
Barna, Guzy & Steffen
◘ Challenge to $1 attorney’s fee award rejected. The 8th Circuit found no abuse of discretion in a district court’s award of $1 in attorney’s fees to plaintiff’s counsel in a FLSA action, where the district court had found that increases in hourly rates were “entirely arbitrary and unreliable,” the hours claimed were “excessive and unreliable,” and the district court had calculated the lodestar as $648.10 despite counsel’s request for more than $30,000 in fees. Skender v. Eden Isle Corp., 33 F.4th 515 (8th Cir. 2022).
◘ Fed. R. Civ. P. 12(b)(1), 12(b)(6) and 12(f); motion to strike and dismiss class action complaint denied. Judge Frank denied the majority of the defendant’s motion to strike and dismiss a class action complaint, requiring additional briefing on several issues and deferring consideration of standing issues until after the class-certification stage. Chen v. Target Corp., 2022 WL 1597417 (D. Minn. 5/19/2022).
◘ Motion for extension of time to apply for attorney’s fees denied. Finding no “good cause” or “excusable neglect,” Judge Wright denied defendants’ motion to extend their time to move for attorney’s fees, finding that defendants’ “mistake of law” “cannot constitute excusable neglect.” Core & Main, LP v. McCabe, 2022 WL 1598230 (D. Minn. 5/20/2022).
◘ Fed. R. Civ. P. 60(b)(1); “mistake;” error of law. The Supreme Court held that a judge’s error of law constitutes a “mistake” for purposes of Fed. R. Civ. P. 60(b)(1), meaning that any “mistake”-based challenge must be brought within one year of the time the judgment becomes final. Kemp v. United States, 142 S. Ct. 1856 (2022).
◘ Arbitration; preemption of California law. The Supreme Court held that the FAA preempted a California law that invalidated contractual waivers of the right to assert “representative claims” under the California private attorney general statute. Viking River Cruises v. Moriana, 142 S. Ct. 1906 (2022).
◘ 28 U.S.C. §1782(a); arbitration; “foreign tribunal;” “international tribunal.” Rejecting attempts to utilize 28 U.S.C. §1782(a) to obtain discovery in aid of foreign arbitrations, the Supreme Court held that for purposes of 28 U.S.C. §1782, “foreign tribunals” and “international tribunals” necessarily exercise “government authority,” meaning that “private adjudicatory bodies do not fall within §1782.” ZF Automotive US, Inc. v. Luxshare Ltd., 142 S. Ct. 2078 (2022).
◘ Arbitration; contract formation; denial of motion to compel arbitration affirmed. Finding that the issue of whether a signatory to an arbitration contract had the authority to bind a buyer was an issue of contract formation for the court rather than an issue for the arbitrator, the 8th Circuit affirmed the district court’s denial of a motion to compel arbitration. GP3 II, LLC v. Litong Capital, LLC, 35 F.4th 1124 (8th Cir. 2022).
◘ Fed. R. Civ. P. 24(a)(2); denial of motion to intervene as untimely affirmed. Reviewing for abuse of discretion and affirming an order by Judge Ericksen, the 8th Circuit found that all four relevant factors weighed in favor of denying a motion to intervene. United Food & Comm. Workers Union, Local No. 663 v. U.S. Dept. of Ag., 36 F.4th 777 (8th Cir. 2022).
◘ 28 U.S.C. §1338(b); removal; remand. Where the plaintiff filed an action in the Minnesota courts alleging unlawful use of its trade name but not asserting any federal cause of action, the defendants removed pursuant to 28 U.S.C. §1338(b), Judge Menendez ordered defendants to file a memorandum supporting their claim of federal subject matter jurisdiction, and defendants attempted to rely on the artful-pleading doctrine to have the court find the presence of a Lanham Act claim and also raised several other arguments in support of federal jurisdiction, Judge Menendez rejected all of the defendants’ arguments and remanded the case to the Minnesota courts. Horizon Roofing, Inc. v. Best & Fast Inc., 2022 WL 2052729 (D. Minn. 6/7/2022).
◘ Motions to amend scheduling orders; multiple cases. Affirming an order by Magistrate Judge Schultz, Judge Wright found that some defendants’ agreement to amend the scheduling order had “no bearing” on the “primary” issue of plaintiffs’ diligence, agreed with the magistrate judge that plaintiffs were not diligent, and rejected plaintiffs’ argument that “changed circumstances” warranted amending the scheduling order. Goyette v. City of Minneapolis, 2022 WL 1963722 (D. Minn. 6/6/2022).
Finding no “good cause,” a “lack” of diligence and that any motion to amend the scheduling order would be “futile,” Judge Wright denied defendant’s letter request for leave to file a motion to modify the scheduling order. Kelley v. BMO Harris Bank, N.A., 2022 WL 1771999 (D. Minn. 6/1/2022).
Affirming Magistrate Judge Schultz’s order denying defendants’ motion to amend the pretrial scheduling order on alternate grounds, Judge Wright found that defendants were not diligent and that the plaintiff would be prejudiced by any amendment. Fair Issac Corp. v. Fed. Ins. Co., 2022 WL 1537957 (D. Minn. 5/16/2022).
Finding neither “good cause” nor “extraordinary circumstances” to amend the pretrial scheduling order, Magistrate Judge Docherty denied plaintiff’s request to amend multiple deadlines in the pretrial scheduling order. Zarling v. Abbott Labs., 2022 WL 1598232 (D. Minn. 5/20/2022).
◘ Privilege; multiple cases. Denying most of the defendant’s motion to compel, Magistrate Judge Docherty found that communications between counsel for multiple parties were work product protected by the “common-interest” doctrine, and also found that billing entries describing “substantive work performed by attorneys or their mental impressions” were privileged. Ploen v. AIG Spec. Ins. Co., 2022 WL 2208328 (D. Minn. 6/21/2022).
Granting in part defendants’ motion to compel, Magistrate Judge Bowbeer determined that the identities of persons who consulted with plaintiff’s counsel regarding communications or payments they may have received from the defendants were privileged. Cohen v. Consilio LLC, 2022 WL 2072546 (D. Minn. 6/9/2022).
◘ Fed. R. Civ. P. 45; subpoena; burden; proportionality; cost-shifting. Granting in part plaintiffs’ motion to compel compliance with a subpoena, Magistrate Judge Docherty considered “the special proportionality considerations governed by Rule 45” and ordered the plaintiffs to assume some of the costs related to the expense of producing the documents they requested. Rochester Drug. Co-op. v. Mylan Inc., 2022 WL 1598377 (D. Minn. 5/20/2022).
◘ First-filed doctrine; second-filed action transferred. Where competing declaratory judgment actions were filed two hours apart, and the court in the first-filed action had already denied a motion to transfer that action to the District of Minnesota, Judge Menendez ordered the second-filed action transferred to the Western District of Washington, where the first-filed action was pending. Mass. Bay Ins. Co. v. G.M. Northrup Corp., 2022 WL 2236333 (D. Minn. 6/22/2022).
◘ Fed. R. Civ. P. 4(d); request for cost of service denied. Magistrate Judge Leung denied plaintiffs’ request for an award of fees and costs related to service where plaintiffs did not “provide any argument in support of their request” and plaintiffs did not establish that they complied with the “technical requirements” of Fed. R. Civ. P. 4(d). SUPERVALU Inc. v. Virgin Scent Inc., 2022 WL 2156233 (D. Minn. 6/15/2022).
◘ Fed. R. Civ. P. 11; sanctions awarded. Where an attorney, acting pro se, had two actions dismissed for lack of personal jurisdiction over the defendants, had been sanctioned by Judge Ericksen pursuant to Rule 11 in the second of those cases, and then filed a third action raising many of the same issues, Judge Tostrud found that the plaintiff had “pretty clearly violated Rules 11(b)(1) and (2),” and granted defendants’ motion for Rule 11 sanctions in an amount to be determined. Pederson v. Kesner, 2022 WL 2163776 (D. Minn. 5/10/2022).
Law Office of Josh Jacobson
◘ Migrant protection protocols (MPP) (“Remain in Mexico”): End of the saga? On 6/30/2022, the U.S. Supreme Court ruled 5-4 in Biden, et al. v. Texas, et al., that the Biden administration’s recission of Remain in Mexico was a valid action.
Key aspects of the Court’s decision:
1) The district court did not have jurisdiction to stop the Biden administration’s recission of Remain in Mexico under the Immigration and Nationality Act, INA § 242(f)(1)/8 USC §1252(f)(1);
2) INA §235(b)(2)(C)/8 USC §1225(b)(2)(C) allows the Department of Homeland Security (DHS), in its discretion, to return noncitizens to Mexico to await their immigration proceedings, i.e., “may,” not “shall;”
3) The DHS Secretary’s second October 2021 Memorandum, replacing its first June 2021 Memorandum (rescinding MPP), has legal effect once the Court’s decision has been certified and sent back down, usually within 28 days—at least under its analysis employing the INA.
What’s next? This may not be the end of litigation since the Court directed the district court to consider the question of the validity of the October 2021 Memorandum under section 706 of the Administrative Procedure Act (APA), in the first instance. Stay tuned. Biden, et al. v. Texas, et al., 597 U.S. (2022). https://www.supremecourt.gov/opinions/21pdf/21-954_7l48.pdf
◘ No jurisdiction for district courts in requests for class-wide injunctive relief. On 6/13/2022, the U.S. Supreme Court ruled 6-3 that INA §242 (f)(1)/8 USC §1252(f)(1) deprives district courts of jurisdiction to entertain respondents’ requests for class-wide injunctive relief. The terms “enjoin” and “restrain” retain their ordinary meaning here. The lower courts do, however, retain the authority to “enjoin” or “restrain” the operation of the relevant statutory provisions “with respect to the application of such provisions to an individual [noncitizen] against whom proceedings under such part have been initiated.” Garland, et al. v. Gonzalez, et al., 596 U.S. ___ (2022). https://www.supremecourt.gov/opinions/21pdf/20-322_m6hn.pdf
◘ No factual findings review by federal courts in discretionary relief proceedings. On 5/16/2022, the U.S. Supreme Court ruled 5-4 that federal courts lack jurisdiction to review facts found in discretionary relief proceedings under INA §245 and other provisions listed in INA §242(a)(2)(B)(i)/8 USC §1252(a)(2)(B)(i). Patel, et al. v. Garland, 596 U.S. ____ (2022). https://www.supremecourt.gov/opinions/21pdf/20-979_h3ci.pdf
◘ No due process violation here. On 6/17/2022, the 8th Circuit Court of Appeals dismissed the petitioner’s claim that the immigration judge violated her due process rights. The court observed that the immigration judge advised her of her right to counsel and there was no absence of fundamental fairness. The court opined that the petitioner’s admission of the charges against her and concession of removability were admissible at a later hearing before a second immigration judge assigned to her case. Nor did the agency commit procedural error when it denied the petitioner’s motion to remand. It was in fact a motion to reopen, failing to comply with the substantive requirements associated with such. Holmes v. Garland, No. 21-2135, slip op. (8th Circuit, 6/17/2022). https://ecf.ca8.uscourts.gov/opndir/22/06/212135P.pdf
◘ New asylum claim not factually independent of prior one. On 5/27/2022, the 8th Circuit Court of Appeals denied the petition for review, finding the Board of Immigration Appeals did not abuse its discretion when it denied the Chinese Christian petitioner’s third motion to reopen given his failure to demonstrate prima facie eligibility for asylum relief. The third motion reflected an effort to relitigate his prior asylum application based, in large part, on alleged mistreatment during a 2005 detention in China on account of his Christian activities. Li v. Garland, No. 21-3328, slip op. (8th Circuit, 5/27/2022). https://ecf.ca8.uscourts.gov/opndir/22/05/213328P.pdf
◘ No nexus between persecution suffered and proposed social groups. On 5/12/2022, the 8th Circuit Court of Appeals upheld the determinations made by the immigration judge and Board of Immigration Appeals that the Guatemalan petitioner failed to establish a nexus between the persecution he suffered and his proposed social groups, that is, his father’s immediate family and “young, Guatemalan men who refuse to cooperate with gang members.” In the former group, the court reasoned that family membership was not a central reason for the threats but rather “incidental or tangential to the extortionists’ motivation—money.” As for the latter group, the court noted it is not recognized under the precedent of Gaitan v. Holder, 671 F.3d 678, 681 (8th Cir. 2012). The court further found that substantial evidence supported the agency’s conclusion that the petitioner suffered neither past persecution (“single violent encounter with gang members [cutting Tojin’s face with a knife and threatening his friend at gunpoint] does not rise to the ‘extreme concept’ of persecution”) nor demonstrated a well-founded fear of future persecution. Tojin-Tiu v. Garland, No. 21-2269, slip op. (8th Circuit, 5/12/2022). https://ecf.ca8.uscourts.gov/opndir/22/05/212269P.pdf
◘ CAT case: BIA failed to address petitioner’s likely treatment in IDP camp in Somalia. On 4/28/2022, the 8th Circuit Court of Appeals upheld the Board of Immigration Appeals’ reversal of the immigration judge’s grant of deferral of removal under the Convention Against Torture (CAT), finding it “squarely address[ed] the evidence on which the IJ [immigration judge] based its finding” and adequately justified why the petitioner, suffering from mental illness, was unlikely to be institutionalized in Somalia. Furthermore, the court found that the board’s determination that the petitioner failed to show why he would more likely than not be forcibly evicted from an internally displaced person (IDP) camp was warranted. However, the court found the board did not address the immigration judge’s findings regarding the petitioner’s likely treatment in an IDP camp and what part of that experience constituted torture. Case remanded for further proceedings. Salat v. Garland, No. 20-2662, slip op. (8th Circuit, 4/28/2022). https://ecf.ca8.uscourts.gov/opndir/22/04/202662P.pdf
◘ Temporary protected status (TPS) and deferred enforced departure (DED).
Venezuela: On 7/11/2022, Secretary Alejandro Mayorkas announced his extension of the designation of Venezuela for temporary protected status for 18 months. The extension will be effective from 9/10/2022 through 3/10/2024. Only those beneficiaries under Venezuela’s existing designation, and who were already residing in the United States as of 3/8/2021, are eligible to re-register for TPS under this designation. News Release. https://www.dhs.gov/news/2022/07/11/dhs-announces-extension-temporary-protected-status-venezuela
Liberia: On 6/27/2022, President Biden announced the extension of DED and employment authorization through 6/30/2024 for those Liberians with DED status (as of 6/30/2022) as well as expansion of DED for Liberians who have been continuously present in the United States since 5/20/2017. “Memorandum on Extending and Expanding Eligibility for Deferred Enforced Departure for Liberians.” https://www.whitehouse.gov/briefing-room/presidential-actions/2022/06/27/memorandum-on-extending-and-expanding-eligibility-for-deferred-enforced-departure-for-liberians/ 87 Fed. Reg. 38871-73 (2022). https://www.govinfo.gov/content/pkg/FR-2022-06-29/pdf/2022-14082.pdf
Cameroon: On 6/7/2022, DHS announced that Secretary Alejandro Mayorkas has designated Cameroon for temporary protected status for 18 months, effective 6/7/2022. Those individuals who have continuously resided in the United States since 4/14/2022 (and continuously physically present in the United States since 6/7/2022), are eligible to apply. 87 Fed. Reg. 34706-13 (2022). https://www.govinfo.gov/content/pkg/FR-2022-06-07/pdf/2022-12229.pdf
Afghanistan: On 5/20/2022, DHS announced that Secretary Alejandro Mayorkas has designated Afghanistan for Temporary Protected Status for 18 months, effective 5/20/2022. Those individuals who have continuously resided in the United States since 3/15/2022 (and continuously physically present in the United States since 5/20/2022), are eligible to apply. 87 Fed. Reg. 30976-88 (2022). https://www.govinfo.gov/content/pkg/FR-2022-05-20/pdf/2022-10923.pdf
R. Mark Frey
Frey Law Office
◘ Trademark: The doctrine of laches is triggered by actionable infringement claims. The United States Court of Appeals for the 8th Circuit recently held that a district court erred by failing to consider the six likelihood-of-confusion factors when it granted summary judgment on the basis of the doctrine of laches. A.I.G. Agency, Inc. sued American International Group, Inc. for common-law trademark infringement and unfair competition related to the “AIG” trademark. Agency began using the AIG mark in Missouri in 1958 in relation to insurance broker services. The earliest possible date International first used the AIG mark was 1968. International obtained a federal trademark registration for the mark in 1981. International sent Agency letters twice, demanding that Agency cease using the AIG mark. Agency responded both times by asserting its right to use the mark in Missouri and Illinois due to its earlier first date of use in those locations. In a third letter, International stated that it would only take legal action if Agency used the mark outside of specific counties in Missouri. Starting around 2012, Agency alleged that International began a more aggressive advertising campaign that led to a notable increase in customers confusing Agency with International. Agency sued International in 2017. International asserted the doctrine of laches and moved for summary judgment. The district court found that both parties had been knowingly operating with the same mark in the same markets for decades and that Agency had knowledge of the risk of consumer confusion from the date of International’s first letter.
On these findings and the basis of laches, the district court granted International’s motion for summary judgment. The 8th Circuit reviewed the laches finding and focused on the doctrine of progressive encroachment in relation to inexcusable delay in asserting a claim. Under the doctrine of progressive encroachment, the period of delay relevant for laches begins when the plaintiff has an “actionable and provable” trademark infringement claim. A trademark infringement claim is “actionable and provable” where a plaintiff can demonstrate a likelihood of confusion under a six-factor analysis. A defendant must demonstrate that the plaintiff could have shown a likelihood of confusion under the six-factor analysis at a time point sufficiently far in the past to constitute inexcusable delay. The 8th Circuit noted that the district court did not conduct the six-factor analysis to determine the likelihood of confusion for the issue of progressive encroachment. Genuine disputes of material fact existed that precluded summary judgment. The case was reversed and remanded for further proceedings. A.I.G. Agency, Inc. v. Am. Int’l Grp., Inc., 33 F.4th 1031 (8th Cir. 2022).
◘ Patents: Exclusive licensing agreements cannot bind future third parties under the theories of equitable estoppel or agency. Recently, the United States Court of Appeals for the 8th Circuit held that a district court did not err in finding that neither a theory of equitable estoppel nor a theory of agency supported binding a third party to a settlement agreement to which it was not a party. Cardiovascular Systems, Inc. (CSI) sued Cardio Flow, Inc. alleging breach of a prior settlement agreement that resolved a dispute of ownership in certain patents. CSI’s late founder, Dr. Shturman, assigned his future patent interest to the company but then attempted to patent some of his inventions on his own, which led to litigation. He died during litigation and left any interest he had to his wife, Lela Nadirashvili.
In 2012, Nadirashvili and CSI entered into a settlement agreement that provided inverse exclusive licenses for each party to the rights of the Shturman patents owned by the opposing party. The agreement also contained a provision allowing the parties to assign their respective rights to a third party if such third party agreed to be bound to the terms of the agreement. Nadirashvili then assigned all her rights from the agreement to Cardio Flow. In district court, CSI alleged Cardio Flow was bound to the agreement through the doctrines of equitable estoppel and agency and had failed to follow its terms. The district court rejected these arguments and granted summary judgment in favor of Cardio Flow. The 8th Circuit reviewed each doctrine in turn de novo. As to equitable estoppel, CSI provided no evidence Cardio Flow had concealed a material fact. Instead, it asserted that concealment of a material fact is not an essential element of equitable estoppel. The court relied on Minnesota Supreme Court precedent and rejected the assertion. The court further clarified that its past decision allowing equitable estoppel upon a non-signing spouse to enforce a mortgage agreement was to be read narrowly and was not comparable to the facts of the case at hand. Within the claim of agency, the court rejected two arguments. First, it found that there was a lack of evidence to establish that Cardio Flow was a joint venture. Second, the court distinguished CSI’s asserted precedent that found a debtor had acted as an agent for a creditor and bound such creditor when making agreements with third parties. The 8th Circuit affirmed the district court and dismissed CSI’s claims of agreement breach. Cardiovascular Sys. v. Cardio Flow, Inc., No. 20-3478, 2022 U.S. App. LEXIS 16314 (8th Cir. 6/14/2022).
◘ Trademark: Claims of trademark infringement do not automatically confer federal subject matter jurisdiction. Judge Menendez recently remanded a case back to state court after finding that a plaintiff’s complaint asserting trademark infringement under state law did not automatically create a question of federal law giving the court subject matter jurisdiction. Plaintiff Horizon Roofing, Inc. sued Best & Fast, Inc. (B&F) in the Ramsey County District Court alleging B&F had unlawfully used Horizon’s trade name within Minnesota in connection with roofing-contractor services. In its complaint, Horizon did not make a claim under federal trademark law. B&F removed the case to federal court under the pretext of federal question jurisdiction. Horizon challenged the removal. The court rejected B&F’s assertion that the complaint must be evaluated under the “artful-pleading” doctrine. Second, the court rejected an argument under the commerce clause that the physical presence of a party in a state for tax purposes established jurisdiction. Third, the court rejected B&F’s argument that the TRO issued by the state court against it implicated federal law because it forced B&F to change its names on the internet, thus affecting its nationwide commerce. The district court concluded that a complaint raising only state law trademark infringement claims does not necessarily implicate a federal question. Horizon Roofing, Inc. v. Best & Fast Inc., No. 22-cv-46, 2022, U.S. Dist. LEXIS 101162 (D. Minn. 6/7/2022).
Merchant & Gould
Zachary M. Robole
Merchant & Gould
◘ Property tax: Assessed value exceeds market value. Along the Interstate 494 and Highway 100 interchange, about five miles west of the airport and the Mall of America, sits a massive and storied hotel property. Over its 50-year history, the property has evolved from a Radisson to a Sheraton to its current branding as a Doubletree property. This hotel was the subject property in a valuation dispute for the 2018 tax year. As of the valuation date, the property was operated by the petitioners under a franchise agreement with Hilton Franchise Holding LLC. For several years, the Doubletree had failed to meet quality assurance evaluations presumably required by the franchise agreement with Hilton. In September 2019, Hilton sent petitioners a notice of default under the franchise agreement. The notice included a final product improvement plan (PIP) from Hilton; failure to meet certain improvement goals could have resulted in a termination of the franchise. Rather than make the required improvements, petitioner negotiated the sale of the subject property to a third party, Vinakom, Inc. Vinakom tendered a $26 million purchase offer to the Doubletree in late 2019; the parties signed a purchase agreement in May 2020, and they closed the sale in July 2020. Between the initial offer and the petitioner’s acceptance of the offer, the covid-19 pandemic began. The pandemic, of course, had a significant effect on the hospitality industry.
The post-valuation sale of the property, the PIP, and the pandemic contributed to a difficult valuation. The Hennepin County assessor estimated the value at $31,586,400 for the 2018 valuation date. The petitioner’s appraiser valued the property at $15,000,000, while the county’s expert appraiser valued the property at $26,000,000. In a lengthy opinion, the tax court considered the income and sales approaches to valuing the property. (The parties stipulated that the cost approach was not appropriate in this case.) The court gave no weight to the petitioner’s expert’s sales comparison approach because court disagreed with the expert’s treatment of the pandemic on the valuation. Instead, the court adopted the county’s expert’s approach, with some modification. Similarly, disagreements with the expert’s methodology led the court to give no weight to the petitioner’s expert’s income capitalization approach. The court again adopted the county’s expert’s income capitalization approach with some modification. Under the court’s final reconciliation, the court held that the 2018 market value of the subject property was $25,500,000. Bloomington Hotel Invs., LLC v. Cnty. of Hennepin, No. 27-CV-19-6973, 2022 WL 2347868 (Minn. T.C. 6/27/2022).
◘ Clear and unambiguous settlement agreement entitles county to summary judgment. Cutters Grove Building LLC entered into a settlement agreement with Anoka County. The agreement covered several tax years – including years 2016 (Pay 17) through 2019 (Pay 20). The agreement specified that “Pay 20 will be held at $1,400,000[.]” The parties adhered to the agreement for several years, but in 2020, Cutters Grove attempted to challenge the assessed value of the property as of 1/2/2019. The county, referencing the settlement agreement, invited Cutters Grove to voluntarily dismiss the petition. Cutters Grove refused. The county, relying on the settlement agreement, moved for summary judgment. The tax court held that the settlement language was clear and unambiguous and that Cutters Grove was contractually obligated to the agreement it negotiated with the county. The court also referenced the strong interest in enforcing settlement agreements. Since there was no issue of material fact, the court granted the county’s motion for summary judgment. Cutters Grove Bldg. LLC, v. Cnty. of Anoka, No. 02-CV-20-2360, 2022 WL 2351535 (Minn. Tax 6/27/2022).
◘ Fact issues preclude summary judgment in conservation easement dispute. In this syndicated conservation easement case, the IRS disallowed a $26 million charitable contribution deduction claimed by Morgan Run Partners, LLC and determined penalties. Morgan timely petitioned for readjustment of the partnership items, and the IRS moved for summary judgment. At issue was whether the “protected in perpetuity” requirement of a qualified conservation easement was met.
Charitable deductions for conservation easements are permitted, but to qualify, the donation of an easement must protect the conservation purpose in perpetuity. Despite this express requirement of perpetuity, even Treasury seems to acknowledge that the only constant is change. The final rules determining whether the perpetuity requirement is met provide that “subsequent unexpected change in the conditions surrounding the [donated] property… can make impossible or impracticable the continued use of the property for conservation purposes.” Nonetheless, “the conservation purpose can… be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding” and the easement deed ensures that the charitable grantee will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift.
The IRS asserted the language of the gift instrument did not meet these rules governing the mandatory division of proceeds. Noting that “unlike most deeds the Court has examined [this deed] does not explicitly address the subject of judicial extinguishment,” the court disagreed that the IRS was entitled to summary judgment. In this instance, the deed expressed the parties’ intention that “no change in conditions… will at any time or in any event result in the extinguishment” of the easement. But if circumstances arose that would justify modifying certain restrictions, the deed envisioned that the Trust would have no power to agree to any amendment that would violate section 170(h) (the provision providing for deductions for qualified conservation easements). This language, the court reasoned, gives Morgan a “reasonable argument that the deed violates neither the ‘judicial extinguishment’ nor the ‘protected in perpetuity requirement.’”
The court discussed another potential problem with the deed. In particular, the deed addressed the possibility that the restrictions might be abrogated by the exercise of eminent domain. One reading of the deed suggested that if the easement were subject to eminent domain, the proceeds to the charitable purpose would be limited. Limiting the proceeds that flow to the charitable purpose is problematic because it is at odds with the perpetuity requirement. However, at a separate point in the deed, the deed provides that in the event of eminent domain, the Trust shall be entitled to “the Trust’s Proportionate share of the recovered proceeds.” The term “proportionate share” seemed a term of art not defined in the deed. The meaning of the term will need to be resolved under state law principles and might require parol evidence. The term “proportionate share” could be defined so as to meet the perpetuity requirements. This created sufficient ambiguity to preclude summary judgment. Morgan Run Partners, LLC v. Comm’r, T.C.M. (RIA) 2022-061 (T.C. 2022).
◘ Individual income tax: Pro se taxpayer entitled to innocent spouse relief. Married taxpayers who elect to file a joint federal income tax return are each fully responsible for the accuracy of the return, regardless of which spouse (if either) prepares the return. Each spouse is also jointly and severally liable for the entire amount of tax shown on the return or found to be owing. Under certain circumstances, a spouse who has made a joint return may seek relief from joint and several liability under procedures set forth in section 6015, often referred to as “innocent spouse relief.”
In this dispute, taxpayer Jan Pocock sought innocent spouse relief after her abusive spouse filed fraudulent returns for several years. Mr. Pocock fraudulently claimed large refunds on the couple’s joint returns by overstating his income and federal income tax withholdings. Mr. Pocock’s scheme was eventually discovered, and Mrs. Pocock timely sought relief under section 6015(f). The commissioner denied relief, and Mrs. Pocock appealed to the tax court.
The court applies a de novo standard and scope of review when resolving section 6015(f) cases. As the tax court explains in this opinion, the court is aided, but not bound, by revenue procedures in which the commissioner prescribes procedures to determine eligibility for equitable relief. As it relates to 6015(f), the revenue procedure directs a multistep analysis with requirements for relief categorized as threshold or mandatory requirements, streamlined elements, and equitable factors.
First, a requesting spouse must satisfy each of seven threshold requirements to be considered for relief. If the requesting spouse meets the threshold requirements, the commissioner will grant equitable relief if the requesting spouse meets each streamlined element. Otherwise, the commissioner will determine whether equitable relief is appropriate by evaluating the equitable factors.
In this dispute, the commissioner found that Mrs. Pocock did not satisfy three of the seven requirements. The requirements the commissioner found lacking included: (4) no assets were transferred between the spouses as part of a fraudulent scheme; (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and (7) absent certain enumerated exceptions, the tax liability from which the requesting spouse seeks relief is attributable to an item of the nonrequesting spouse. The tax court addressed each requirement in turn and held that Mrs. Pocock met each requirement. The court characterized the commissioner’s contrary findings as “fatally speculative.”
The court then determined that Mrs. Pocock met the three requirements for streamlined relief: she (1) is no longer married to Mr. Pocock; (2) she would suffer economic hardship if not granted relief; and (3) she did not know or have reason to know about Mr. Pocock’s scheme. Pocock v. Comm’r, T.C.M. (RIA) 2022-055 (T.C. 2022).
◘ Taxpayers who lost home in foreclosure not eligible for home mortgage interest deduction. Home mortgage interest is often deductible as qualified residence interest (QRI). In the context of foreclosures, whether a payment is one of principal (not deductible) or interest (deductible) can be tricky. The general rule is that voluntary partial payments made by a debtor to a creditor are to be applied first to interest and then to principal. Payments made in the context of
foreclosure are not considered voluntary. Nonetheless, if the debtor is not insolvent, the tax court has applied the proceeds from a foreclosure sale to interest first and then to principal.
In this dispute, taxpayers who lost their Florida home to foreclosure claimed a home mortgage interest deduction of just over $100,000—the accrued interest owing at the time of the foreclosure sale. Although, as is often the case, the amount realized in the foreclosure sale did not cover the principal balance due from the taxpayer-borrowers, the taxpayers argued that the interest deduction was appropriate because the terms of the credit agreement applied payments first to interest and then to principal. The commissioner countered that since the foreclosure bid did not cover the principal balance due, no interest was paid and therefore no deduction was appropriate.
Although the court suggested that the taxpayers might have been able to establish their entitlement to the deduction, the record was silent as to how the lender applied the funds received from the foreclosure sale. Although the court could not definitively conclude that the lender received only the payment of principal, petitioners did not show, by a preponderance of the evidence, that they had paid the interest. Because the taxpayers failed to meet their burden, the court denied the deduction. The court went on to hold, however, that the taxpayers acted reasonably and in good faith and therefore were not liable for an accuracy-related penalty. Howland v. Comm’r, T.C.M. (RIA) 2022-060 (T.C. 2022).
◘ Sale of real estate lots results in capital loss. Most introductory income tax classes teach students to distinguish ordinary assets from capital assets. Attentive students realize that the favorable treatment of capital gains combined with the relatively unfavorable treatment of capital losses often incentivizes taxpayers to label an asset “capital” if its disposition results in a gain, but “ordinary” if its disposition results in a loss. In Musselwhite v. Comm’r, T.C.M. (RIA) 2022-057 (T.C. 2022), a taxpaying couple claimed an ordinary loss of just over $1 million after the sale of undeveloped lots in a subdivision. The commissioner disagreed with the characterization and issued a notice of deficiency as well as an accuracy-related penalty.
The court, applying the multifactor test set out by the 4th Circuit, agreed with the commissioner. Among the factors to be considered are (1) the purpose for which the property was acquired; (2) the purpose for which the property was held; (3) improvements, and their extent, made to the property by the taxpayer; (4) the frequency, number, and continuity of sales; (5) the extent and substantiality of the transaction; (6) the nature and extent of the taxpayer’s business; (7) the extent of advertising or lack thereof; and (8) the listing of the property for sale directly or through a broker. In this dispute, the court held that factors 1 through 6 weighed against the taxpayers and only factors 7 and 8 weighed in the taxpayer’s favor. Since the overwhelming weight of the factors was against the taxpayers, the court determined that the lots in the hands of the taxpayers were not stock in trade, inventory, or property primarily held for sale to customers in the ordinary course of business. The lots therefore were capital assets and the loss was not properly characterized as ordinary. Musselwhite v. Comm’r, T.C.M. (RIA) 2022-057 (T.C. 2022).
Mitchell Hamline School of Law