Criminal Law
JUDICIAL LAW
• 4th Amendment: Geofence warrants are not categorically unconstitutional. Following his murder conviction, appellant argues the district court should have suppressed evidence obtained pursuant to a geofence warrant used to link appellant’s cellphone to the location where the victim’s body was found. The data-gathering process involved three steps, the first two of which provided only anonymous device data to law enforcement. The warrant application stated law enforcement would apply for a separate warrant for de-anonymized data. The anonymous data law enforcement received identified a device present near the location of the victim’s body at the time the victim was believed to have been murdered and at a nearby gas station, where surveillance footage showed individuals and a vehicle police knew to be possibly involved in the murder. Police obtained a second warrant to obtain the identifying subscriber information for that device, and the data received identified the subscriber as appellant.
In this case of first impression, the Minnesota Court of Appeals holds that geofence warrants are not categorically barred by the federal or state constitutions. The constitutionality of a geofence warrant must be examined on a case-by-case basis. While general warrants—those specifying only an offense without identifying an arrestee or an area to be searched—are prohibited, geofence warrants are not per se general warrants. The scope of geofence warrants will vary based on the circumstances, and in some circumstances, they may pass constitutional muster.
As to the geofence warrant in this case, the court finds the warrant satisfied the requirements of the federal and state constitutions. The warrant was supported by probable cause, as the application set forth a nexus between the suspected crime and the place to be searched and the location data to be seized. The warrant also described the exact coordinates for the geofence, the applicable time frame, the type of data to be seized, and where that data was maintained, satisfying the requirement of particularity. Although the warrant authorized the search of any device in the geofence’s boundary, the court finds it was not overbroad, because it was limited to a relatively small area along a desolate road far from houses or buildings. The warrant posed little risk of invading the privacy of uninvolved individuals. State v. Contreras-Sanchez, A22-1579, 5 N.W.3d 151 (Minn. Ct. App. 4/1/2024).
• Assault: Statements expressing a plan to beat the victim bloody while wielding a wooden board are direct evidence of intent. Appellant was charged with third-degree assault (substantial bodily harm) for striking the victim, causing her to fall to the ground unconscious, and with second-degree assault-fear (dangerous weapon) for thereafter brandishing a 2”x3”x3’ wooden board and threatening to beat the victim. A jury found him guilty on both charges. The court of appeals affirmed the second-degree conviction but reversed the third-degree conviction as a lesser-included offense. The Supreme Court granted review of the second-degree assault conviction.
Minn. Stat. §609.222, subd. 1 (second-degree assault), prohibits assaulting another with a dangerous weapon. Appellant was charged with committing the assault by acting with the intent to cause the victim to fear immediate bodily harm or death. Under the definitions in Minn. Stat. §609.02, subds. 6 and 8, the question in this case is whether the state presented sufficient evidence that appellant intended to use the wooden board in a manner calculated or likely to produce death or great bodily harm.
The court finds that appellant’s statements of planned intent made contemporaneously with the assault are a rare example of direct evidence of intent, specifically direct evidence of his intended use of the wooden board. The court holds that appellant’s intended use of the board to “beat [the victim] bloody” was likely to produce great bodily harm, supporting the dangerous weapon element of second-degree assault. The evidence here was sufficient for the jury to conclude that appellant assaulted the victim with a dangerous weapon. State v. Jones, A22-0172, 4 N.W.3d 495 (Minn. Sup. Ct. 4/3/2024).
• Restitution: Affidavit in support of restitution challenge must be sufficiently detailed to put the state on notice that the amount of loss is being challenged. The state appealed the district court’s elimination or reduction of eight different restitution awards for the state’s failure to prove the amounts of loss sustained as a result of respondent’s various racketeering, perjury, theft, and receipt of stolen property charges. Respondent was originally ordered to pay over $124,000 in restitution to 13 victims. After he filed a “pro se affidavit challenging restitution,” a hearing was held at which the state presented no evidence. The state argued that respondent failed to provide notice in the affidavit that he intended to challenge the amounts of loss. The district court reduced restitution awards to one victim and eliminated awards to seven others, reducing the total amount of restitution due to just over $5,800.
When an offender challenges a restitution order, Minn. Stat. §611A.045, subd. 3(a), requires that they file an affidavit “setting forth all challenges to the restitution or items of restitution, and specifying all reasons justifying dollar amounts of restitution which differ from the amounts requested by the victim or victims.” The court of appeals holds that the plain language of this subdivision “requires that an offender’s affidavit… be sufficiently detailed to put the state on notice of each type of challenge being made to a particular item of restitution.”
Here, respondent’s affidavit provided sufficient notice of his challenges to the amounts awarded to three victims but did not provide sufficient notice as to four others. The restitution order is affirmed as to the three victims sufficiently addressed in respondent’s affidavit but reversed as to the four not addressed in sufficient detail. Restitution to the final victim awarded in the court’s final restitution order is also reversed, as that victim never made a restitution request. State v. Seeman, A23-0571, 5 N.W.3d 171 (Minn. Ct. App. 4/8/2024).
• Implied consent: Statement that “refusal to take a test is a crime” complied with advisory requirement. Respondent was arrested for DWI and police obtained a warrant to conduct a blood or urine test. A trooper showed respondent the warrant, told him she had applied for a warrant for a blood test, and said, “refusal to take a test is a crime.” Respondent submitted to a blood test that showed the presence of methadone, and his driver’s license was revoked. Respondent argued the trooper’s statement did not comply with Minn. Stat. §171.177, subd. 1’s requirement that a driver “be informed that refusal to submit to a blood or urine test is a crime.” The Minnesota Court of Appeals agreed and reversed respondent’s driver’s license revocation.
The Supreme Court notes that the best practice is for officers to read section 171.177, subd. 1’s advisory verbatim but declines to hold that an exact recitation is required. A straightforward reading of the section requires a general advisory that refusal to take a test is a crime. Respondent’s proffered interpretation, that the section requires an advisory that a person may refuse a blood or urine test and may be charged with a crime only if they refuse both types of tests, requires police to inform drivers of the substance of section 171.177, subd. 2. The court finds respondent’s interpretation unreasonable, as subdivision 2’s language was not included in the advisory language in subdivision 1 and subdivision 2 gives the officer the choice between a blood or urine test unless the driver objects. Reversed and remanded to the court of appeals to decide the other issues raised on appeal. Nash v. Comm’r of Pub. Safety, A22-1238, 4 N.W.3d 812 (Minn. Sup. Ct. 2024).
• Firearms: Interior of a motor vehicle on a public road is a “public place.” Respondent was charged with carrying a BB gun in a public place after police found a BB gun under the driver’s seat of his vehicle. The district court dismissed the charge, finding the BB gun was not in a “public place” when inside a privately owned motor vehicle. The state appealed.
Minn. Stat. §624.7181, subd. 2, makes it a gross misdemeanor to “carr[y] a BB gun, rifle, or shotgun on or about the person in a public place.” This appeal centers on section 624.7181, subd. 1(c)’s definition of “public place.” The court of appeals looks to State v. Serbus, 957 N.W.2d 84 (Minn. 2021), which interpreted the use of “public place” in a similar statute that prohibits carrying a pistol in a public place while under the influence of alcohol. Serbus held that the Legislature intended to prohibit drivers from carrying pistols on public highways while impaired. The court here notes the Serbus court’s observation that “place” may be used in either a “geographical sense” or a “spatial sense.”
Section 624.7181, subd. 1(c)’s definition consists of two main clauses: the first describing two general types of public places and the second limiting the scope of the first clause by providing examples of places that are not public places. The language of both clauses, however, demonstrate that “public place” is used in this section in a geographical, not spatial, sense. Moreover, other provisions in section 624.7181 indicate that the interior of a motor vehicle that is on a public road falls within subdivision 1(c)’s definition of “public place.”
As the record shows respondent drove a motor vehicle on a public road with a BB gun inside, the district court erred in dismissing the complaint for lack of probable cause. State v. Bee, A23-1257, 5 N.W.3d 713 (Minn. Ct. App. 4/15/2024).
Samantha Foertsch
Bruno Law PLLC
samantha@brunolaw.com
Stephen Foertsch
Bruno Law PLLC
stephen@brunolaw.com
Employment & Labor Law
JUDICIAL LAW
• PTSD claim upheld; social worker entitled to workers compensation. A Ramsey County social worker was entitled to workers’ compensation benefits due to post-traumatic stress disorder (PTSD) resulting from her exposure during her work to details of a murder committed by one of her clients. Affirming a ruling of the Workers Compensation Court of Appeals, the state Supreme Court held that the claimants met the criteria for the affliction. Tea v. Ramsey County, 2024 WL 323339 (Minn. 2024) (nonprecedential).
• Police proceedings; maintain health insurance. A pair of proceedings by police officers resulted in maintenance of their health insurance coverage.
An administrative law judge (ALJ) lacks authority to decide whether a former police officer had received a right to continued health insurance for first responders under Minn. Stat. §299A.465, Subd 1(b). The Minnesota Court of Appeals overturned the decision of an ALJ who ruled that an ex-Eden Prairie police officer had relinquished a statutory right to continued duty disability employment health coverage through a broadly worded release in a workplace settlement agreement, but stated that the city could pursue a civil action against the officer seeking appropriate relief. City of Eden Prairie v. Serafini, 2024 WL 1709627 (Minn. App. 4/22/2024) (nonprecedential).
A Woodbury police officer was entitled to continued health insurance benefits after non-payment led to discontinuation of coverage. Affirming a Washington County District Court ruling, the appellate court held that the officer could seek reinstatement to the group insurance plan under Minn. Stat. §299A.464 after his coverage had lapsed while he worked elsewhere before returning to Woodbury. Alden v. City of Woodbury, 2024 WL 13972 (Minn. App. 2/5/2024) (nonprecedential).
• Reprisal rejected; no adverse action. A University of Minnesota graduate student/employee’s claim of reprisal under the Human Rights Act was rejected because she did not experience adverse action by virtue of the school’s not acting upon her assertion that a co-worker’s complaint against her constituted improper reprisal under the Act. Winegar-Schultz v. University of Minnesota Board of Regents, 2024 WL 1046994 (Minn. App. 3/11/2024) (nonprecedential).
• No protected conduct; reprisal claim dismissed. An employee who complained of a religiously insensitive remark about a prospective employee lost her reprisal claim after she was fired a couple of weeks later. Affirming a summary judgment by the Anoka County District Court, the court of appeals held that a reprisal claim by the discharged employee was not actionable under the Human Rights Act because she did not engage in any “statutorily protected conduct.” Mullis v. Pro-Plating, Inc., 2024 WL 1364965 (Minn. App. 4/1/2024) (nonprecedential).
LEGISLATIVE ACTION
• State family and medical leave update. Minnesota’s new state paid family and medical leave program, enacted by the Legislature last year to be implemented in 2026, will be funded by an increased payroll tax of up to .88% under a measure approved by the Legislature during the 2024 session. The program, which offers 12 weeks of family leave and 12 weeks of personal medical leave, with a 20-week annual cap, will be financed by a payroll tax split between employers and employees. The measure initially was to be seeded by $668 million from the state’s then-record $17.5 billion budget surplus, with ongoing funding from the payroll tax up to a 1.2% maximum.
Marshall H. Tanick
Meyer, Njus & Tanick
mtanick@meyernjus.com
Environmental Law
JUDICIAL LAW
• U.S. Supreme Court grants certiorari to review validity of narrative permit conditions under CWA. On 5/28/2024, the United States Supreme Court granted certiorari to review a 2023 Clean Water Act (CWA) decision by the 9th Circuit Court of Appeals, City and County of San Francisco v U.S. Environmental Protection Agency. As in last year’s high-profile CWA decision, Sackett v. EPA, 598 U.S. _____ (2023), the Court will once again consider—and potentially curtail—the scope of EPA’s authority to regulate pollutant discharges.
The San Francisco case involves the city’s combined sewer system, a wastewater collection system that conveys both sewage and stormwater through shared pipes to a treatment facility. The facility discharges treated wastewater into the Pacific Ocean through multiple discharge points, including a primary discharge point (Point no. 001) that is more than three miles from shore. Because of this distance, Point no. 001 is under exclusive federal jurisdiction, so the city’s National Pollutant Discharge Elimination (NPDES) permit for the treatment facility is issued jointly by EPA and the California Regional Water Quality Control Board for the San Francisco Bay Region, which has delegated authority to implement the NPDES permit program. During heavy precipitation, the city’s treatment facility, like all combined sewer systems, can exceed its capacity and overflow in largely untreated condition into the Pacific Ocean. Such combined sewer overflows (CSOs), which often contain high levels of pollutants, are subject to additional scrutiny under the NPDES program, and permitted municipalities with combined sewer systems must implement extensive control measures and develop a long-term control plan (LTCP) to control CSOs.
In 2019, EPA and the Regional Water Board reissued the city’s NPDES permit for its treatment facility. In addition to numeric effluent limitations—which specify maximum concentrations or loading of pollutants known to be of concern—the permit contains two non-numeric “narrative” conditions, providing that the city’s discharge shall not (1) “cause or contribute to a violation of any applicable [state or federal] water quality standard,” or (2) “create pollution, contamination, or nuisance” as defined by California code. The city challenged these narrative permit conditions as too vague. The city argued, among other things, that the conditions are unlawful because (1) EPA failed to meet its CWA obligation to specify the pollutant limits or operational requirements that will achieve compliance with water quality standards (WQS), and (2) EPA failed to follow its own rules for setting numeric effluent limits based on WQS.
The 9th Circuit disagreed. The court first pointed to broad language in the CWA that authorizes permitting agencies to “to impose limitations necessary to ensure the discharger’s adherence to ‘any applicable water quality standard’” (citing 33 U.S.C. §1311(b)(1)(C)); this language, the court concluded, does not exclude the San Francisco permit’s broad requirement to comply with all applicable WQS. Second, the court held that the regulation the city claimed EPA and the board violated—40 C.F.R. §122.44(d)(1)(i), which provides NPDES permit limitations must control all pollutants in a proposed discharge that “are or may be discharged at a level which will cause, have the reasonable potential to cause, or contribute to an excursion above any State water quality standard, including State narrative criteria for water quality” (emphasis added)—did not require EPA and the board to only conduct a so-called “reasonable potential” analysis before establishing a permit effluent limitation. Rather, the court held that “Section 122.44(d)(1) does not set forth an exclusive process for imposing [water-quality-based effluent limitations]. The regulations in this section set forth minimum requirements for imposing pollutant-specific WQBELs. It does not state that the permitting authority cannot set general narrative limitations limits to achieve compliance with WQS.” Accordingly, the 9th Circuit concluded EPA had authority under the CWA to impose these narrative conditions.
Among the issues the Supreme Court will be asked to consider when reviewing the 9th Circuit’s decision is the potential impacts to the CWA’s “permit shield.” Section 402(k) of the CWA, 33 U.S.C. §1342(k), provides that “[c]ompliance with a [NPDES] permit issued pursuant to this section shall be deemed compliance” with most CWA requirements for purposes of agency enforcement actions and CWA citizen suits. The key here is that to be entitled to the enforcement “shield” offered by this provision, a NPDES permit holder must be in compliance with the permit’s terms. The types of narrative conditions imposed in San Francisco’s NPDES permit are so broad and vague, regulated parties will argue, that it is almost impossible for a permittee to ever know if it is in “compliance” with the permit and thus protected by the permit shield. By contrast, judging compliance with pollutant-specific numeric effluent limits is straightforward. However, EPA and state agencies such as the Minnesota Pollution Control Agency (MPCA) that issue NPDES permits often rely on narrative permit limits as a “catch-all” means of assuring compliance with WQS to protect rivers, lakes, and other waters. For example, at least one recent MPCA NPDES permit contained the following narrative condition, the legality of which that would surely be challenged if the Supreme Court overturns the San Francisco decision: “The Permittee shall operate and maintain the facility and shall control runoff, including stormwater, from the facility to prevent the exceedance of water quality standards specified in Minnesota Rules, chs. 7050 and 7060.” City and County of San Francisco v U.S. Environmental Protection Agency, 75 F.4th 1074 (9th Cir. 2023).
• 8th Circuit affirms approval of drilling petitions in North Dakota. The 8th Circuit Court of Appeals recently affirmed a district court’s grant of summary judgment on behalf of the Bureau of Land Management (BLM) and Slawson Exploration Company related to the issuance of drilling permits. The Mandan, Hidatsa, and Arikara Nation (MHA) brought suit against BLM, challenging its approval of Slawson’s eight petitions to drill and extract oil and natural gas beneath Lake Sakakawea, located on the Fort Berthold Indian Reservation. The 8th Circuit found BLM did not act arbitrarily or capriciously in approving the petitions, and its decision was based on rational evidence within the administrative record.
Critical to understanding the 8th Circuit’s decision is an examination of the circumstances giving rise to litigation. Lake Sakakawea is the third-largest reservoir in the United States and the sole source of drinking water for MHA. Beneath the lake is the Bakken, one of the most valuable oil reserves in the world. Oil production on the reservation accounts for approximately one-sixth of North Dakota’s oil production. In 2011, Slawson submitted 11 applications to construct a well to extract oil and natural gas from beneath the lake. The proposed drill sites would be set back 300 feet from the lake. A six-year process, input from nearly 100 agencies and stakeholder groups, and a 425-page environmental assessment (EA) resulted in the BLM issuing a finding of no significant impact for Slawson’s drilling project and approving the petitions.
MHA then subsequently passed a resolution that required all drilling operations be set back from the lake no less than 1,000 feet. One month later, BLM approved Slawson’s applications. MHA appealed that approval, and BLM affirmed the decision. MHA then brought suit against BLM under two theories: first, that BLM’s approval of Slawson’s petitions was arbitrary and capricious when it precluded MHA from further developing the record regarding health concerns; and second, BLM’s approval was based on an insufficient record. MHA also contended that additional evidence could establish tribal jurisdiction over the drilling project. Slawson intervened, and the district court granted BLM’s and Slawson’s motions for summary judgment. MHA appealed to the 8th Circuit.
The Eighth Circuit rejected MHA’s argument that it could assert tribal jurisdiction over the project. The court found that tribal jurisdiction was not a relevant factor to the approval of Slawson’s application, noting that “MHA’s jurisdiction over Slawson’s Project is an open question, which is not before this court because it was not a relevant factor to the Project’s approval.” Rather, for BLM’s approval to be arbitrary and capricious, BLM must have failed to rely on relevant factors or made a decision unsupported by rational basis. No such determination was present. The court determined that BLM evaluated all relevant factors, and that MHA’s setback law was not a relevant consideration. As the court explained, “The applicability of MHA’s setback law was not an original reason for approving the applications because the setback law was not a relevant factor to the approval. This court declines to adopt the novel position that an agency must explain not evaluating a non-relevant factor, which is a rational decision.” In addition, the court determined that BLM considered relevant factors in accordance with Congress’s Mineral Leasing Act of 1920.
The court further explained that compliance with applicable laws and regulations—in this case the MHA setback—is the obligation of the permit holder. BLM was acting within its sphere of expertise in approving drilling applications and need not take local regulations into account.
Finally, the 8th Circuit determined that the environmental assessment sufficiently discussed the lake as MHA’s sole source of drinking water and identified no adverse impacts to the lake due to Slawson’s mitigation efforts. The court concluded, “BLM’s approval of the Project based on the record was not arbitrary or capricious because it met the statutory and regulatory requirements—reasoned decisionmaking.” Mandan, Hidatsa & Arikara Nation v. U.S. Department of the Interior, 95 F.4th 573 (8th Cir. 2024).
• 5th Circuit ruling limits the EPA’s application of significant new use rules under the Toxic Substances Control Act when regulating existing industrial practices. On 3/21/2024, the 5th Circuit Court of Appeals held that the EPA exceeded its statutory authority under the Toxic Substances Control Act (TSCA) when it used a significant new use rule to prohibit a fluorination process that had been used by Inhance Technologies LLC for decades. 15 U.S.C. §2604(a)(1)(A)(ii). In Inhance Technologies, the court considered whether a significant new use can include a pre-existing industrial practice that was not previously known to the EPA. Because the practice did not recently come into existence, the court held that it could not be considered “new” and therefore could not be regulated under a significant new use rule. Instead, the EPA would have to go through the more rigorous rulemaking process under TSCA that applies to all chemical substances.
In Inhance Technologies, Inhance challenged two EPA orders prohibiting the company from continuing to process and manufacture PFAS chemicals. For many years, Inhance fluorinated plastic containers to create a protective barrier on the containers. After an investigation, the EPA found that the fluorination process produced PFAS chemicals. PFAS chemicals have been widely used in industrial processes, but emerging evidence increasingly links PFAS to various types of risks to human health and the environment. In 2015 the EPA published a significant new use rule that prohibited the processing or manufacturing of a subset of PFAS chemicals, including those PFAS chemicals produced as part of Inhance’s fluorination process. Applying its authority under the significant new use rule, the EPA ordered Inhance to cease the processing and manufacturing of PFAS chemicals.
Inhance challenged the EPA’s interpretation of “significant new use,” arguing that the decades-old fluorination practice was not a new use. Whether or not a chemical is “new” or has a “significant new use” determines how the EPA can make rules to regulate it. See 15 U.S.C. §2605. Section 5 of the TSCA authorizes the regulation of new chemicals or a significant new use of a chemical. Id. §2604(a)(1)(A)(ii). In contrast, Section 6 allows for the regulation of all chemical substances. See id. §2605(a). However, Section 6 contains a more rigorous rulemaking process than Section 5. The EPA promulgated the significant new use rule under Section 5, which only extends to new chemicals or significant new uses. Inhance argued that the “new” use of a chemical is one that has recently come into existence, and therefore their decades-old fluorination process could not be regulated under a significant new use rule. However, the EPA argued for a broader definition of new, proposing that a new use is one that was not previously known to the EPA.
On appeal, the 5th Circuit agreed with Inhance, finding that a “new” use is one that has recently come into existence. Because Inhance’s fluorination process had been used since the early 1980s, the 5th Circuit determined that the process could not have recently come into existence and thus could not be regulated under the agency’s Section 5 authority. The 5th Circuit determined this interpretation to be the most consistent with the text of Section 5, which includes anticipatory language like “before processing or manufacturing” and “projected volume” Id. §2604(a)(1)(B). Because such language is forward looking, the 5th Circuit determined Section 5 could not apply to a process that had been in use for years. Additionally, the 5th Circuit warned that the EPA’s definition proved too expansive because, under EPA’s definition of “new,” Section 5 would swallow up Section 6 and allow the agency to take advantage of the more relaxed process in Section 5.
Ultimately, the 5th Circuit’s narrow interpretation of what constitutes a “new” use under Section 5 of TSCA suggests that even if an existing use of a chemical was previously unknown to the EPA, it may not be considered a “significant new use” under Section 5 and cannot be regulated under a significant new use rule. In order to regulate existing practices, the agency will have to follow the more rigorous process outlined in Section 6 of TSCA. Inhance Technologies, LLC, v. EPA, 96 F.4th 888 (5th Cir. 2024).
• Applying MERA, Minnesota Court of Appeals overturns injunction on Minneapolis 2040 Plan. The Minnesota Court of Appeals overturned an injunction on the City of Minneapolis’s 2040 Comprehensive Plan on 5/13/2024 in State by Smart Growth Minneapolis v. City of Minneapolis (Smart Growth III). The district court granted plaintiffs’ motion for the imposition of an amended injunction on 9/5/2023. The amended injunction enjoined the city from implementing any of the residential portion of the 2040 Plan until the city completed “an appropriate and properly conducted” environmental impact statement. The injunction also required the city to revert to the residential development portions of the 2030 Plan and corresponding land use ordinances. The court of appeals decision is the third and latest appeal in this lengthy challenge to Minneapolis’s 2040 Plan.
After the plan’s passage in 2018, three groups (collectively referred to as “Smart Growth”) sued the city, arguing the plan could cause environmental harm and arguing that the city needed to conduct an analysis under the Minnesota Environmental Rights Act (MERA) before implementing the plan. The district court’s injunction followed a remand from the Minnesota Court of Appeals in December 2022. See State by Smart Growth Minneapolis v. City of Minneapolis, No. A22-0852, 2022 WL 17957328 (Minn. App. 12/27/2022) (Smart Growth II). In that opinion, the court of appeals held that although the district court did not err in granting summary judgment in favor of Smart Growth, the record was insufficient to support the initial injunction. Id. at *6.
A court may issue an injunction under MERA if a plaintiff demonstrates: (1) that the requested relief is “necessary or appropriate to protect the air, water, land or other natural resources located within the state from pollution, impairment, or destruction,” and (2) that the requested relief “provides an adequate remedy without imposing unnecessary hardship on the enjoined party.” Minn. Stat. §116B.07; Smart Growth III at *7.
The Minnesota Court of Appeals held that Smart Growth had the burden of demonstrating that the injunctive relief requested was necessary or appropriate to protect the environment and would not impose necessary hardship on the city of Minneapolis. The court of appeals also found that the district court improperly assigned the burden of proof to the city.
With the burden placed on Smart Growth, the court of appeals held that the record did not support the district court’s finding that reversion to the 2030 plan is necessary or appropriate to protect the environment. The court observed that the record lacked evidence to support a finding that reversion to the 2030 plan would be better for the environment than ongoing implementation of the 2040 plan. Moreover, the appellate court agreed with the city’s contention that an injunction forcing the city to revert to the 2030 plan would cause unnecessary hardship, as it would force the city to be out of compliance with its obligations under the Metropolitan Land Planning Act (MLPA). By forcing the city to choose between compliance with MLPA and MERA, the district court abused its discretion. The appellate court concluded reversing the district court order and denying the motion. Smart Growth III, 2024 WL 2118957. No appeal has been filed yet, and the deadline for appeal is 60 days from 5/13/2024. State by Smart Growth Minneapolis v. City of Minneapolis, No. A23-1382, 2024 WL 2118957 (Minn. Ct. App. 5/13/2024) (Smart Growth III).
Jeremy P. Greenhouse, Cody Bauer, Ryan Cox, Vanessa Johnson, Molly Leisen, and Shantal Pai, Shaadie Ali, and Ellen Stojak — Fredrikson & Byron
Jake Beckstrom — Vermont Law School 2015
Federal Practice
JUDICIAL LAW
• 9 U.S.C. §3; stay rather than dismissal of action pending arbitration required. In a unanimous decision issued barely three weeks after oral argument, the Supreme Court held that 9 U.S.C. §3 requires federal courts to stay an action pending the conclusion of an arbitration, and does not permit the dismissal of the action as an alternative.
There was a sharp circuit split on this issue, with the 8th Circuit previously having held (Green v. SuperShuttle Int’l, Inc., 653 F.3d 766 (8th Cir. 2011)) that dismissal of the action was permitted. Smith v. Spizzirri, ___ S. Ct. ___ (2024).
• No mootness; failure to meet “formidable burden.” Resolving a split between the 4th and 9th Circuits, the Supreme Court unanimously held that the government’s “sparse” declaration that the plaintiff would not be placed on the No Fly List in the future “based on currently available information” was not sufficient to meet its “formidable burden” to establish that the plaintiff’s action was moot, finding that a case “does not automatically become moot when a defendant suspends its challenged conduct and then carries on litigating for some specified period.” FBI v. Fikre, 144 S. Ct. 771 (2024).
• Panel order denying motion to dismiss in 8th Circuit is not the law of the case. Where appellees’ motion to dismiss an appeal as untimely was denied by an administrative panel in a one-sentence order, and the untimeliness argument was renewed by several of the appellees in their briefs on the merits, the majority of an 8th Circuit merits panel found that “controlling precedent” allowed it to consider the jurisdictional question anew and concluded that the appeal was untimely.
A vigorous dissent by Judge Melloy argued that the administrative panel’s decision constituted the law of the case absent “clear error or manifest injustice.” Nordgren v. Hennepin Cnty., 96 F.4th 1072 (8th Cir. 2024).
• Law of the case; second summary judgment motion following remand. Where the 8th Circuit reversed and remanded a district court’s grant of summary judgment to defendants, and the district court granted defendant’s second summary judgment motion based on the same record, the 8th Circuit held that the law-of-the-case doctrine barred the second summary judgment motion, and again reversed and remanded the action to the district court. Bates v. Richardson, 97 F.4th 582 (8th Cir. 2024).
• Motion to dismiss appeal for lack of jurisdiction granted. Where the defendant insurer moved to dismiss claims brought by an insured challenging the insurer’s calculation of the “actual cash value” of an insured’s totaled car; the insurer cited the existence of a mandatory arbitration clause in its motion but did not move to compel arbitration; Judge Tunheim granted in part and denied in part the insurer’s motion to dismiss; the insurer appealed, arguing that the surviving claim was subject to mandatory arbitration; and the plaintiff moved to dismiss the appeal for lack of jurisdiction, the 8th Circuit found that it lacked jurisdiction over the appeal because the insurer had not moved to compel arbitration or otherwise “invoke[d] the FAA in its motion to dismiss.” Varela v. State Farm Mut. Auto. Ins. Co., 98 F.4th 902 (8th Cir. 2024).
• Fed. R. Civ. P. 11(c)(2); no safe harbor; sanctions reversed. While finding that claims were “not warranted by existing law or by a nonfrivolous argument for extending, modifying or reversing existing law,” and that counsel’s tactics “were an abuse of the legal system,” the 8th Circuit reversed an award of sanctions against plaintiff’s counsel where the moving defendant failed to comply with the safe harbor requirements of Fed. R. Civ. P. 11(c)(2). Caranchini v. Nationstar Mortgage, LLC, 97 F.4th 1099 (8th Cir. 2024).
• Motion to enforce settlement agreement denied. Judge Davis adopted a report and recommendation by Magistrate Judge Docherty that found there was no enforceable settlement agreement to dismiss a Section 1983 claim, where defendants’ settlement offer was made but not immediately accepted, plaintiff’s counsel needed time to consult with his client, and the stipulation prepared by defendants’ counsel was labeled “draft.” Hart v. County of Dakota, 2023 WL 10553646 (D. Minn. 11/22/2023), report and recommendation adopted, 2024 WL 1331988 (D. Minn. 3/28/2024).
• Motion to compel compliance with subpoena; need for “consistency” in multiple districts. Granting in part and denying in part a motion to compel compliance with a subpoena issued in connection with an action pending in the Western District of Kentucky, Magistrate Judge Docherty granted the motion in part, acknowledging a similar ruling by a magistrate judge in the Southern District of New York, and emphasizing the need for “[c]onsistency across federal district courts.” Republic Nat’l Dist. Co. v. Johnson Bros. Liquor Co., 2024 WL 1479182 (4/5/2024).
• Attorney’s-eyes-only protective order; access by in-house counsel. Affirming an order by Magistrate Judge Docherty, Judge Menendez found no clear error in his determination that in-house counsel was a “competitive decisionmaker,” and should not have access to discovery materials carrying an “attorney’s eyes only” designation. Toyota Motor Sales, U.S.A., Inc. v. Allen Interchange L.L.C., 2024 WL 1598771 (D. Minn. 4/12/2024).
• Motion to compel denied; failure to meet and confer. Magistrate Judge Foster denied the defendant’s motion to compel the production of documents despite the defendant’s claim to have engaged in “multiple meet-and-confers” where the record reflected only a single meet and confer at which the disputed documents were not discussed. NimbeLink Corp. v. Digi Int’l Inc., 2024 WL 1599941 (D. Minn. 4/12/2024).
• Fed. R. Civ. P. 6(b)(1)(B); extension of time; excusable neglect. Where plaintiff’s counsel failed to timely oppose defendants’ motion for judgment on the pleadings, blaming the loss of an employee who was responsible for calendaring as well as his own case of covid-19, Judge Menendez found excusable neglect and granted plaintiff’s request for permission to file an untimely response to the motion. Webb v. City of Minneapolis, 2024 WL 1653721 (D. Minn. 4/17/2024).
• Motion to stay execution of judgment without posting of full bond denied. While acknowledging that a bond requirement can be waived in “appropriate circumstances,” Judge Ericksen denied defendants’ motion to stay execution of a judgment without the posting of a bond, or with the posting of a partial bond, finding that defendants’ “challenges” in securing a bond “do not rise to the level of extraordinary circumstances.” Willis Elec. Co. v. Polygroup Ltd., 2024 WL 1653709 (D. Minn. 4/17/2024).
• Motion for entry of a default judgment denied; service of process questions. Judge Blackwell denied the plaintiff’s motion for entry of a default judgment where, even after the plaintiff responded to an order to show cause requiring it to show the service was proper, the plaintiff failed to provide “even the barest information regarding whether and where a copy of service of process was directed.” Huntington Nat’l Bank v. Arm the Animals LLC, 2024 WL 1436314 (D. Minn. 2/28/2024).
• Prevailing defendants’ request for costs denied; indigent plaintiff. Judge Tostrud denied the prevailing defendants’ request for almost $4,700 in costs, finding that the plaintiff’s financial situation was “dire,” and that his claims had not been brought in bad faith. Currie v. Aswegan, 2024 WL 1757151 (D. Minn. 4/22/2024).
• 28 U.S.C. §1292(b); motion to certify issues for interlocutory appeal denied. Magistrate Judge Schultz denied the plaintiff’s motion to certify two issues for interlocutory appeal under 28 U.S.C. §1292(b), finding that both issues involved “controlling” questions of law, but neither issue met the other two elements of the applicable three-part test. Fair Isaac Corp. v. Federal Ins. Co., ___ F. Supp. 3d ___ (D. Minn. 2024).
• Motion for leave to file untimely third amended complaint denied. Judge Bryan denied plaintiffs’ untimely motion for leave to file a third amended complaint where the plaintiffs failed to argue that “good cause” existed, and there could be no good cause where the plaintiffs failed to establish their diligence. Collingham v. Northfield Hosp. & Clinics, 2024 WL 1794403 (D. Minn. 4/25/2024).
• Fed. R. Civ. P. 25; attempted dismissal; failure to serve next-of-kin. Judge Bryan declined a request for dismissal filed by the deceased plaintiff’s counsel, finding that the plaintiff’s death extinguished his counsel’s authority to act on his behalf, and that counsel had failed to serve a statement of death on plaintiff’s next-of-kin as required by Fed. R. Civ. P. 25(a)(3). Beckmann v. Equifax Info. Servs. LLC, 2024 WL 1739915 (D. Minn. 4/23/2024).
Josh Jacobson
Law Office of Josh Jacobson
joshjacobsonlaw@gmail.com
Intellectual Property
JUDICIAL LAW
• Copyright: SCOTUS holds the Copyright Act contains no separate time-based limit on monetary recovery. The Supreme Court of the United States recently held that damages under the Copyright Act may be recovered for conduct occurring more than three years prior to filing suit based on an assumption of the existence of the “discovery rule.” In 2018, Plaintiff Sherman Nealy sued Warner Chappell Music for copyright infringement related to music created in the 1980s and based on infringing conduct dating back to 2008, 10 years before the suit was filed. Under the Copyright Act, a plaintiff must file suit “within three years after the claim accrued.”17 U.S.C. § 507(b). Nealy argued that he did not become aware of the infringing activity until 2016 because he was serving time in prison. The district court, relying on a decision from the 2nd Circuit, ruled that Nealy’s suit was timely under the discovery rule but that he could only recover damages or profits for infringing conduct that occurred in the three years preceding filing of the action. Nealy appealed. The 11th Circuit reversed, rejecting the notion of a three-year damages bar on a timely claim. In accord with the 9th Circuit, the 11th Circuit reasoned that the text of the Copyright Act does not support the existence of a separate damages bar for an otherwise timely copyright claim. The Supreme Court granted certiorari to resolve the circuit split and to answer the question whether a copyright plaintiff can recover damages for acts that allegedly occurred more than three years before the filing of a lawsuit, assuming the existence of the discovery accrual rule. The Supreme Court affirmed. The Court held Section 507(b) establishes a three-year period for filing suit, beginning to run when a claim accrues. No separate three-year period for recovering damages exists in the statute. The Court held that the 2nd Circuit’s view lacked textual support and was self-defeating, because the 2nd Circuit’s holding would first recognize the discovery rule and then take away the value conferred by that recognition by preventing recovery of damages for those older infringements. The Court concluded the Copyright Act contains no separate time-based limit on monetary recovery. Warner Chappell Music, Inc. v. Nealy, No. 22-1078, 144 S. Ct. 1135 (U.S. 5/9/2024).
• Patents: En banc Federal Circuit throws out design patent obviousness test. The United States Court of Appeals for the Federal Circuit, sitting en banc, recently overruled the long-standing Rosen-Durling test used to assess nonobviousness of design patents. GM Global Technology LLC (GM) owns U.S. Design Patent No. D797,625 (the D’625 patent), which claims a design used for the front fender of GM’s 2018–2020 Chevrolet Equinox. LKQ Corporation and Keystone Automotive Industries, Inc. (collectively LKQ) instituted an inter partes review of GM’s D’625 patent, asserting that the challenged claim was unpatentable in view of prior art designs. The Patent Trial and Appeal Board held that LKQ did not establish by a preponderance of evidence that the prior art reference anticipated the claims of the D’625 patent. The board then applied the Rosen-Durling test to assess the nonobviousness of the claimed design. The Rosen-Durling test requires that the primary reference be “basically the same” as the challenged design claim (Rosen reference) and that any secondary references must be “so related” to the primary reference that features in one would suggest application of those features to the other. The board held that LKQ failed to identify a Rosen reference. LKQ appealed, and a panel of the Federal Circuit affirmed the board decision. The Federal Circuit granted rehearing en banc and vacated the panel opinion (1) to consider whether the Supreme Court’s obviousness test as articulated in KSR International implicitly overruled or abrogated the Rosen-Durling test and (2) if not, to determine whether the court should nonetheless eliminate or modify the Rosen-Durling test. The court held the Rosen-Durling test was not consistent with the Supreme Court’s articulation of principles underlying obviousness in both framework and threshold rigidity. The court did not decide whether KSR International overruled the Rosen-Durling test but took the opportunity sitting en banc to consider the merits of the Rosen-Durling test for the first time. The court held the Rosen-Durling test was improperly rigid. Because the §103 obviousness statutory language applies to both utility patents and design patents, the court found the obviousness test articulated in the Supreme Court’s Graham decision would also work for design patents. The court vacated the board’s determination of nonobviousness of the D’625 patent and remanded for the board to assess nonobviousness under the articulated framework. LKQ Corp. v. GM Global Tech. Operations LLC, No. 21-2348, 2024 U.S. App. LEXIS 12139 (Fed. Cir. 5/21/2024) (en banc).
Joe Dubis
Merchant & Gould
jdubis@merchantgould.com
Tax Law
JUDICIAL LAW
• Taxation of transfers between spouses. In Estate of Anenberg v. Comm’r of Internal Revenue, the court interpreted complex provisions regarding transfers between spouses. Petitioner’s father and stepmother formed a revocable trust (family trust) that provided for the creation of various subtrusts upon the father’s death. Id. at *2. Two of these subtrusts were marital trusts that provided discretion to elect certain property to be held in qualified terminable interest property (QTIP). QTIPs under section 2056(b)(7) allow marital deductions. When petitioner’s father passed away, among the assets passed from the family trust to the martial trusts was a 49.75% interest in the family’s company and a clause that all income from the marital trusts be paid to petitioner’s stepmother. Petitioner and his brother held contingent remainder interests in the corpus of the trust.
In 2009, petitioner, as the executor of his father’s estate, elected to treat the property in the marital trusts as QTIP and claimed the corresponding marital deduction for the value of the property. In 2011, petitioner (then as a trustee of the marital trusts) petitioned to terminate the marital trusts in favor of outright distribution of the assets, which was granted the following year. After the assets were provided to petitioner’s stepmother, she gifted some shares and sold virtually all others to different trusts of petitioner’s father’s heirs. In return, she received promissory notes of equal value that bore interest at the applicable federal rate. She reported the gifted shares as gifts; however, she claimed the sold shares did not result in a gift tax. In 2020, the commissioner issued a notice of deficiency to the now-deceased stepmother’s estate because of the termination of the marital trusts and subsequent sale of the family company shares. Her estate filed a motion for partial summary judgment asking the court to determine that “(1) the termination of the Marital Trusts and the distribution of the assets of the Marital Trusts to [petitioner’s stepmother] did not result in a deemed gift tax under [section] 2519, and (2) [petitioner’s stepmother]’s sale of the [family company] shares received from the Marital Trusts in exchange for promissory notes did not result in a deemed gift under [section] 2519.”
In general, marital deductions do not eliminate or reduce the tax on the transfer of marital assets out of the marital unit but instead, permit deferral until the death of or gift by the surviving spouse. See Estate of Morgens v. Comm’r of Internal Revenue, 133 T.C. 402, 410 (T.C. 2009). QTIP as a regime allows a decedent to pass income interest for the surviving spouse’s lifetime, deduct the full value of the property from the decedent’s taxable estate, and designate the beneficiaries of the property. See Estate of Morgens v. Comm’r of Internal Revenue, 678 F.3d 769, 711 (C.A. 9, 2012).
While the parties agreed that petitioner’s stepmother owned a qualifying income interest for life in QTIP, the commissioner contended that the interest was disposed sufficiently to trigger a section 2519 tax. The estate argued that no more than a permissible conversion of the qualifying income interest for life (and no gift) occurred because petitioner’s stepmother received full and adequate consideration for the property she transferred.
The issue for the commissioner’s argument was that gift tax applied “on the transfer of property by gift during the calendar year.” I.R.C. §2501(a)(1). Here, no transfer of property by gift occurred for which gift taxes had not already been imposed. Further contentions by the commissioner were found unpersuasive and partial summary judgment was granted in the petitioner’s favor. Estate of Anenberg v. Comm’r of Internal Revenue, 162 T.C. No. 9 (T.C. 2024).
• Contrary to expectation, commissioner argues petitioner correctly updated “last known address.” Petitioner was granted a motion to dismiss after the court determined commissioner’s notice of deficiency was invalid as it was not sent to petitioner’s last known address.
Petitioner filed a federal tax return in 2004 that listed his address as the Hazeltine address. From 2010 to 2017, petitioner served a prison sentence, during which he received a personal injury settlement from a civil lawsuit filed against the prison. In 2018, petitioner prepared a substitute return for 2014 in which he reported the settlement as income. Commissioner, however, determined deficiencies and sent a notice to the Roslyn address in 2018.
Following the deficiency determinations, petitioner did not protest and was assessed the deficiency along with additions. This was followed by a federal tax lien, notice of which was also sent to the Roslyn address. After petitioner failed to pay the tax liability, commissioner certified as and issued to petitioner a Notice of Certification of Your Seriously Delinquent Federal Tax Debt in 2021 to a third address, the Richview address. Petitioner responded, seeking review of the notice of deficiency and notice of certification. In 2021, both parties filed motions to dismiss for lack of jurisdiction. Within petitioner’s motion, he stated he never lived at the Roslyn address, where commissioner argued that “third-party reporting related to petitioner’s ex-wife supported changing petitioner’s last known address to the Roslyn Address.” In petitioner’s sur-reply, he argued again that he never lived at the Roslyn address, but his son of the same name may have been living at the Roslyn address with petitioner’s ex-wife in 2014. Commissioner argued in response that “petitioner’s address was updated in accordance with a notification from the USPS National Change of Address database,” which petitioner denied.
The court’s jurisdiction to hear a case seeking redetermination of a deficiency relies upon a valid notice of deficiency and timely filing of a petition. See Rule 13(a), (c). While there is no dispute that petitioner did not file a petition within the 90-day period, the court “interpret[ed] his contention as a challenge to the validity of the notice of deficiency because the notice of deficiency was not sent to his last known address,” which would render the notice invalid.
The court acknowledged that sending the notice to a taxpayer’s last known address is not mandatory. A taxpayer’s last known address is rather “a ‘safe harbor’ address to which” a notice can be sent. McKay v. Comm’r of Internal Revenue, 89 T.C. 1063, 1068 (T.C. 1987) (quoting Mulvania v. Comm’r of Internal Revenue, 81 T.C. 65, 68 (T.C. 1983)). If a taxpayer “takes advantage of this safe harbor, then the notice of deficiency ‘shall be sufficient,’ and whether the taxpayer actually receives the notice is immaterial.” See also Fehrs v. Comm’r of Internal Revenue, 65 T.C. 346, 351 (T.C. 1975). A notice mailed to an improper address, however, is still valid as long as a taxpayer receives actual notice. See Dees v. Comm’r or Internal Revenue, 148 T.C.M. 1, 8 (T.C. 2017). Here, the issue is “the notice of deficiency was mailed to petitioner’s last known address within the meaning of [I.R.C. §]6212.”
While “last known address” is not defined within the I.R.C., Treasury Regulation §301.6212-2 provides guidance that while the “last known address” is presumptively that found on the most recently filed tax return, the IRS will make updates if a taxpayer provides clear and concise notification of a different address. It further provides that “[a] taxpayer’s last known address will be updated if the taxpayer’s name and last known address in the IRS records match the taxpayer’s name and old mailing address contained in the NCOA database.”
Generally, when the courts hear cases involving “last known address” disputes, petitioners are arguing that they provided clear and concise notice to the IRS; here, however, petitioner contends that he not only never lived at the Roslyn address, but that no change of address form was ever submitted to the USPS which updated the NCOA database. In this case, since petitioner did not have access to information that would allow him to prove his claims, and commissioner did, the court allocated the burden of proof to commissioner. With the burden allocated to commissioner, the initial burden to demonstrate petitioner’s last known address was presumed to be met by the presumption of official regularity. Petitioner rebutted this presumption successfully with his sworn testimony that he not only did not submit a change of address form, but he was also incarcerated at the time the change of address form was processed, and his son of the same name may have been residing at the Roslyn address with his ex-wife.
With the burden of production then on commissioner to show compliance with regulation, the commissioner provided IDRS (integrated data retrieval system) transcripts. Without reaching the question of whether the IDRS can be relied upon to show compliance with the last known address regulation, the court determined the transcripts to be insufficient evidence of commissioner’s compliance. In addition to inconsistencies within the transcripts, they showed that a change form was processed while petitioner was incarcerated but failed to show it was properly processed. Subsequently, the court found commissioner failed to carry his burden of production and granted the petitioner’s motion to dismiss for lack of jurisdiction. Phillips v. Comm’r of Internal Revenue, T.C.M. 2024–44 (T.C. 2024).
• Value of claimed charitable easements grossly misstated. The tax court continues to face charitable conservation easement disputes. Two are reported here:
In 2013, members of the Georgia-based partnership Buckelew Farm, LLC claimed a $47.6 million charitable deduction after making a conservation easement donation of land. Buckelew Farm substantiated this deduction by claiming the highest and best use of the property was as a “307 lot hunting and conservation oriented residential community.” Respondent disagreed, claiming the highest and best use of the property was only “continued timber production, possible agriculture, recreation… and extremely low-density residential use.” Expert witnesses for the respondent pointed out that “no new subdivision developments were issued building permits” in nine years since the property was within a county experiencing negative population growth and “still suffering the consequences of the 2008 housing market crash.” Additionally, it was at best unclear whether a development of the kind Buckelew Farm proposed was even legally permissible in that area. The tax court was persuaded on the respondent’s valuation argument and found the proper deduction amount to be $4.5 million. Since there was a significant discrepancy between the claimed amount and the court’s findings, the court assessed a 40% penalty under section 6662(a) and (h) for gross valuation misstatements. Buckelew Farm, LLC v. Comm’r of Internal Revenue, T.C.M. (RIA) 2024-052 (T.C. 2024).
In a second easement case, Savannah Shoals, LLC v. Comm’r of Internal Revenue, the court also determined that the taxpayer had grossly overstated the value of the easement. The taxpayer prevailed on two other issues in the case, however.
Savannah Shoals, LLC sold more than 50% of its membership interest on 12/28/2017, triggering a technical termination of the old partnership (described by the court as “Old Shoals”) and the immediate creation of a new partnership (described by the court as “New Shoals”). Later that same day, New Shoals donated a conservation easement of 103 acres and took a $23 million charitable contribution deduction for the donation. Shoals substantiated the deduction by claiming the highest and best use of the land was as an aggregate quarry capable of producing $23.1 million over 25 years. There were three issues in this case: the exact dates of the taxable year for the new partnership after its technical termination, whether the new partnership appropriately attached a qualified appraisal to their charitable deduction paperwork, and the proper value of the conservation easement donation.
The tax court ruled for the petitioners on the first two issues. First, the court found that the new partnership’s taxable year could begin on the same day as its technical termination, since Treasury regulations state that a new partnership is formed “immediately” after the technical termination and New Shoals conducted business on that date. Treas. Reg. §1.708-1(b)(3). Second, the court found that the petitioners appropriately attached a qualified appraisal. The court explained that “literal compliance” with all 11 items of information required by Treasury Regulations §1.170A-13(c)(3)(ii) to constitute a “qualified appraisal” is not necessary. Rather, “substantial compliance” with the 11 items is sufficient, since providing “most of the information required” gives the IRS enough to evaluate the appraisal’s reliability and accuracy. Since the petitioners provided most of the information required, it was a qualified appraisal.
But the court ruled against the petitioners on the third issue. Using the before and after valuation method, the tax court found the proper value of the easement donation to be $480,000. The court disagreed with petitioners that the highest and best use of the property was as an aggregate quarry, noting that an aggregate quarry was not financially feasible, and sided instead with the respondent’s experts that the land’s highest and best use was instead as low-density residential and recreational uses. Since the petitioners’ valuation of the property was over 200% of the correct valuation amount, the court awarded a 40% gross valuation misstatement penalty against petitioners. Savannah Shoals, LLC v. Comm’r of Internal Revenue, T.C.M. (RIA) 2024-035 (T.C. 2024).
Morgan Holcomb, Leah Olm, Adam Trebesch
Mitchell Hamline School of Law
Torts & Insurance
JUDICIAL LAW
• Breach of fiduciary duty; Minnesota Business Corporation Act. Plaintiffs are co-beneficiaries of a trust. The principal asset of the trust is a 90% ownership stake in a corporation. Defendant bank was the trustee of the trust. Plaintiffs filed suit against defendant for breach of fiduciary duty as “controlling shareholder” of the company and unfairly prejudicial conduct under the Minnesota Business Corporation Act, seeking damages and a buyout of their interests in the company. The district court granted defendant’s motion for judgment on the pleadings. The court of appeals affirmed the dismissal of both claims. The court of appeals concluded that appellants did not plead sufficient facts to show that defendant was a shareholder of the company, and therefore, defendant did not owe or breach any shareholder fiduciary duties to appellants. The court of appeals also concluded that plaintiffs could not move for a buyout of their beneficial interests in the corporation because that motion could only be made in an action initiated by a shareholder, and plaintiffs had disavowed their own shareholder status.
The Minnesota Supreme Court affirmed in part, reversed in part, and remanded. The Court reversed judgment on the pleadings with respect to the breach of fiduciary duty claim. The Court reasoned that the complaint provided sufficient factual allegations that defendant was a shareholder under Minnesota’s notice pleading standard, including allegations that defendant was a “controlling shareholder,” “called shareholder meetings,” “selected the members of the board of directors,” and “directly voted as a shareholder on company actions.” Given these allegations, the Court held that plaintiffs did not need to allege that defendant “was registered on the books or records as the owner of shares[.]” This claim was remanded to the court of appeals for consideration of whether or not fiduciary duties were owed by a shareholder to plaintiffs, the “beneficial owners” of the shares.
With respect to the second issue—whether plaintiffs could move for a buyout of their beneficial interests—the Court was equally divided. As a result, the Court left “undisturbed the court of appeals’ conclusion” that the buyout remedy is not available to plaintiffs. Demski v. U.S. Bank Nat’l Ass’n, No. A22-0777 (Minn. 5/8/2024). https://mn.gov/law-library-stat/archive/supct/2024/OPA220777-05082024.pdf
Jeff Mulder
Bassford Remele
jmulder@bassford.com