Cinatl v. Prososki
| Decision Date | 16 October 2020 |
| Docket Number | No. S-19-972.,S-19-972. |
| Citation | 949 N.W.2d 505,307 Neb. 477 |
| Parties | Robert H. CINATL, appellant, v. Karen R. PROSOSKI, Personal Representative of the Estate of Robert R. Prososki, deceased, and Karen R. Prososki, individually and as beneficiary of the Estate of Robert R. Prososki, deceased, appellee. |
| Court | Nebraska Supreme Court |
Michael J. Synek, for appellant.
Patrick J. Nelson, of Law Office of Patrick J. Nelson, for appellee.
Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, Papik, and Freudenberg, JJ.
An arbitration award rejected Robert H. Cinatl's fraud-in-the-inducement claim seeking to rescind his contract to purchase an orthodontics practice. After the district court declined to vacate the arbitrator's award, the court confirmed it. Cinatl appeals. Because the refusal to vacate the award remained interlocutory until the award was confirmed, we consider but reject Cinatl's challenge to the first order. We conclude the court properly confirmed the award. Finding no merit to Cinatl's other arguments, we affirm the court's judgment.
In 1989, Robert R. Prososki (Dr. Prososki) began an orthodontics practice in Kearney, Nebraska. He ceased practicing in July 2013, upon being diagnosed with cancer. Dr. Prososki hired an agent to broker a sale of the practice. The broker prepared an investor prospectus for the practice and provided a copy to Cinatl, an orthodontist. Relying on representations in the prospectus, Cinatl entered into a written contract in October with Dr. Prososki for the purchase of the practice and entered into a lease with Dr. Prososki and his wife for the office building.
On October 29, 2013, Cinatl began operating the practice. Shortly thereafter, he discovered what he considered to be misrepresentations in the investor prospectus. In December, Cinatl notified Dr. Prososki and his wife, via their attorney, that Cinatl wanted to set aside the contract. He received no response.
In August 2015, Dr. Prososki died. At the end of October, Cinatl ceased operating at the practice's location, though he rented space elsewhere for the next 14 months to "complete [his] patients."
In 2016, Cinatl sued Karen R. Prososki (Prososki), both as the personal representative of the estate of Dr. Prososki and individually. He sought rescission of the "Contract of Purchase and Sale of Dental Practice" and lease. Cinatl alleged that fraudulent misrepresentations were made, that he relied upon them, and that he suffered damages as a result of the false representations. Prososki's answers (filed separately in her respective capacities) alleged that the complaint failed to state a claim upon which relief can be granted.
Because the contract contained a paragraph specifying mandatory arbitration "pursuant to the applicable arbitration laws of Nebraska," Cinatl moved for appointment of an arbitrator. The district court found that the action was subject to arbitration and sustained a motion to compel arbitration.
The arbitrator conducted a hearing and received extensive evidence. Cinatl testified that by the first week of November 2013, he "knew there was something very wrong, but [he] couldn't put [his] finger on it." He later discovered that many files which had been represented to him as active files had "been finished." Cinatl called the broker in early November and stated that something was "very, very wrong." Cinatl testified a review of files conducted in December showed that the number of active patients would have been 345 but that the prospectus estimated 700 such patients. In December, Cinatl met with the attorney for Dr. Prososki and his wife to discuss perceived misrepresentations in the prospectus. Cinatl asked that Dr. Prososki and his wife "take the practice back, find somebody else."
In September 2015, Cinatl engaged a forensic accounting firm to review the practice's records. Justin Frauendorfer, one of the owners of the accounting firm, reviewed the investor prospectus to verify its accuracy for Cinatl.
Frauendorfer discovered that there were 311 active patient files on August 5, 2013, but that the prospectus represented that there were approximately 700 active files. According to Frauendorfer, "[f]or this to be over 50 percent off is why in my professional opinion I would say that it was potentially intentional or reckless." Frauendorfer could not say that the number of active patients was intentionally misrepresented—partly because he had not spoken with the person who made the representation—but he could say it was reckless.
Frauendorfer discovered other discrepancies. The prospectus showed 200 patients in recall on August 5, 2013, but Frauendorfer found the number to be 228. The prospectus showed 1,400 total files, but Frauendorfer came up with "approximately, 600 plus files." He believed the statement that 1,400 total files existed showed a reckless disregard for the truth. The investor prospectus indicated that the number of new patients per month was 10, but Frauendorfer found that it was 2. Frauendorfer opined that "this practice summary sheet was materially misstated."
Frauendorfer testified that there were 72 active Medicaid patients on August 5, 2013, representing $73,225 in Medicaid patient liability. He found there were 239 private pay patients on August 5, of which 39 had paid for services in advance, amounting to $34,654.50. According to Frauendorfer, the amount of contracts receivable on August 5 was $322,948.24, which changed to $269,672.64 on the October 28 date of closing, a difference of $53,275.60. Based on Frauendorfer's experience, he would have expected that adjustment of the amount to be credited to Cinatl as the purchaser.
Cinatl testified that "[a]t a minimum," he was seeking to have the contract to purchase and the lease rescinded. He asked to be put back in the position that he occupied before entering the contract and lease and for Prososki to be restored back to the extent possible.
On August 3, 2018, the arbitrator found in favor of Prososki on the issues pertaining to the sale of the practice and the lease. The arbitrator determined that Prososki had no role in the marketing and sale of the practice and made none of the representations about which Cinatl complained. The arbitrator found that at all times between October 28, 2013, and the end of October 2015, Cinatl operated the orthodontic practice and retained the benefits of all he had acquired under the contract.
The arbitrator concluded it was unnecessary to determine whether Prososki committed fraud in inducing Cinatl to enter into the contract. The arbitrator reasoned that Cinatl "did not rescind the contract but elected instead to receive the benefits of it for almost two years after he discovered the facts leading him to believe that he was defrauded." Paragraph 13 of the arbitrator's decision stated:
During the time he operated the practice, Cinatl's ability to return Prososki to presale status quo diminished with each passing day. "The princip[al] relief effected by rescission is to place the parties in the same condition as they were in before the making of the contract sought to be rescinded." Kracl v. Loseke, 236 Neb. 290, 303, 461 N.W. 2d 67, 76 (1990). Id.
The arbitrator noted that while Cinatl expressed dissatisfaction in late 2013 with what he considered to be misrepresentations by Dr. Prososki, he did not pursue rescission until January 2016—"over a year and ten months later"—when he filed a statement of claim in the estate of Dr. Prososki. By that time, the status quo at the time of closing of the contract could not be restored, particularly because Dr. Prososki had died and Cinatl had left patients without an orthodontist. The arbitrator determined that "[b]y continuing to operate his orthodontic practice at the office for over a year and ten months after the December 7, 2013, meeting, Cinatl ratified the contract and waived any cause of action he might have had arising from his purchase of the practice."
Within 90 days of the arbitrator's decision, Cinatl filed an application to vacate the award. He alleged that "[t]he arbitrator exceeded his authority by rendering a decision based upon issues and defenses which the parties had not raised in the pleadings, including but not limited to: estoppel, laches, statute of limitations, and waiver."
On January 28, 2019, the court entered an order denying the application to vacate. The court noted that it did not have the bill of exceptions from the arbitrator's hearing or the written arguments submitted by the parties to the arbitrator. But in reviewing the arbitrator's decision, the court did not "find a substantial, if any, reliance by the arbitrator on the equitable defenses alleged." The court reasoned:
Essentially, the arbitrator found that he did not need to address the issues of fraud or misrepresentation because it was impossible, given the passage of time, and circumstances to provide the remedy of rescission in that both parties could not be placed back in the status quo existing at the time the contracts were entered. This Court specifically refers to paragraph 13 of the arbitrator's decision.
Ten days later, Cinatl filed two motions. One motion, seeking a new trial, requested that the court "vacate the judgment and decision set forth in the Court's Order, filed January 28, 2019." Cinatl identified four grounds for a new trial under Neb. Rev. Stat. § 25-1142 (Reissue 2016). The other motion, which was later sustained, requested an order for preparation of the record from the arbitration hearing. The next day, Prososki filed a motion to confirm the arbitrator's award.
During a hearing on the motion for new...
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