Sikora v. Vanderploeg

Citation212 S.W.3d 277
PartiesXavier SIKORA v. Douglas A. VANDERPLOEG.
Decision Date03 July 2006
CourtCourt of Appeals of Tennessee

Kenneth R. Jones, Jr. and William B. Hawkins, III, Nashville, Tennessee, for the appellant, Douglas A. VanderPloeg.

Susan D. Bass and Thomas M. Pinckney, Nashville, Tennessee, for the appellee, Xavier Sikora.

OPINION

WILLIAM C. KOCH, JR., P.J., M.S., delivered the opinion of the court, in which WILLIAM B. CAIN and FRANK G. CLEMENT, JR., JJ., joined.

This appeal involves a dispute over the sale of a chiropractic practice. The purchaser made several significant changes in the practice following the sale and, when the practice began to fail, filed an action for breach of warranty against the seller in the Circuit Court for Davidson County. The seller attributed the failure of the practice to the seller's poor business judgment and counterclaimed for unpaid lease payments. Following a three-day bench trial, the trial court found that the seller had breached the warranties of sale and awarded the purchaser $34,443 in damages. The trial court offset this award with a $18,294 judgment in favor of the seller for unpaid lease payments and then awarded the purchaser an additional $52,592 in attorney's fees and costs. We have determined that the trial court erred by failing to reform the purchase agreement to reflect the true agreement between the parties and by concluding that the seller violated his warranty to disclose all material or significant information regarding the practice.

I.

In 1985, Douglas A. VanderPloeg established VanderPloeg Chiropractic on Murfreesboro Road in Nashville. Ten years later, in 1995, he joined forces with a physician and formed a second, affiliated practice, Priority One Medical, P.C., to provide integrated medical and chiropractic services at the same Murfreesboro Road location. At the same time, Dr. VanderPloeg incorporated Priority One Staff & Equipment, Inc. (Priority One Staff) to furnish management, administrative, and personnel services to VanderPloeg Chiropractic and Priority One Medical. The integrated practice did not perform as well as Dr. VanderPloeg had hoped, and four years later, on May 15, 1999, he dissolved VanderPloeg Chiropractic's relationship with Priority One Medical and Priority One Staff.

Later in 1999, Dr. VanderPloeg decided to sell VanderPloeg Chiropractic and to move to Maine. He hired the Paragon Group, Inc., a New Jersey company specializing in the valuation of chiropractic and other professional practices, to appraise the business and serve as the exclusive listing agent for the sale. The Paragon Group's detailed appraisal report dated December 23, 1999 placed the fair market value of the tangible and intangible assets of VanderPloeg Chiropractic at $200,000 excluding the value of the accounts receivable.

The Paragon Group appraisal report emphasized that the most valuable transferable asset a professional practice like VanderPloeg Chiropractic has is its professional goodwill, i.e., the likelihood that existing patients will continue to purchase chiropractic services in the future as long as patient care remains satisfactory and the practice's professional standards are maintained. Moreover, the report made it clear that the $200,000 figure was based largely on the professional goodwill Dr. VanderPloeg had built up over the preceding fourteen years of successful chiropractic practice at the same location.

Xavier Sikora followed an unconventional path to becoming a chiropractor. He held a number of jobs following his graduation from high school in 1979, including a ten-year stint as a prison guard in Illinois. After receiving chiropractic treatment for a workplace injury, he decided to return to school in 1996 and study to become a chiropractor. He took out loans to support himself and his family while he was in school and received his chiropractic degree from Palmer College in Iowa in October 1999.

Immediately upon receiving his chiropractic degree, Dr. Sikora began looking for an established practice to purchase and operate as a solo practitioner. As part of his search, he contacted the Paragon Group in New Jersey. The Paragon Group sent him its appraisal report for VanderPloeg Chiropractic. Dr. Sikora reviewed the report carefully but, by his own admission, did not understand the analysis and financial data contained in it.1 Nevertheless, impressed by the professionalism of the report and the amount of information it contained, Dr. Sikora decided to investigate VanderPloeg Chiropractic further. After a single brief trip to Nashville to visit the practice, Dr. Sikora decided to purchase it from Dr. VanderPloeg for $200,000. Thus, on January 27, 2000, he entered into a non-binding letter of intent with Dr. VanderPloeg.

Dr. Sikora hired a Nashville attorney, Arshad (Paku) Khan,2 to prepare the necessary documents. On February 22, 2000, Mr. Khan sent Dr. VanderPloeg's transactional attorney a draft purchase agreement. It contained a warranty from Dr. VanderPloeg regarding VanderPloeg Chiropractic's total billings and collections for the 1999 calendar year with blanks where the appropriate figures could be inserted. On February 28, 2000, Dr. VanderPloeg's attorney wrote to Mr. Khan thanking him for the draft and suggesting a variety of changes. He advised Mr. Khan that the warranty provision regarding the practice's 1999 billings and collections should be removed because the months prior to "June 1999" would reflect not only the performance of VanderPloeg Chiropractic but also the performance of the integrated practice with Priority One Medical and Priority One Staff.

At some point during the next few weeks, Dr. VanderPloeg provided Dr. Sikora with a handwritten chart showing VanderPloeg Chiropractic's monthly billings for June through December 1999. At the bottom of the column showing each month's billings, the chart indicated that VanderPloeg Chiropractic's total billings for the seven-month period were "[$]257,952." On March 19, 2000, Dr. Sikora sent his attorney, Mr. Khan, a copy of this chart along with two sheets of paper with notes in Dr. Sikora's handwriting. The chart from Dr. VanderPloeg showed each month's billings from June through December 1999, and one of the sheets in Dr. Sikora's handwriting laid out VanderPloeg Chiropractic's monthly collections for the same period. Dr. Sikora's handwritten notes contained the figures "$257,952" and "$146,609" for billings and collections and indicated clearly that the figures covered the seven-month period from June through December 1999. However, when Mr. Khan inserted the figures into the warranty provision of the purchase agreement, he erroneously indicated that they represented the billings and collections for the six-month period from July through December 1999 instead of the seven-month period from June through December 1999 as indicated in the information Dr. VanderPloeg provided to Dr. Sikora and that Dr. Sikora then forwarded to Mr. Khan. No one noticed Mr. Khan's mistake in the dates, and four days later, on March 23, 2000, Dr. Sikora and Dr. VanderPloeg executed the flawed purchase agreement.

A week later, Dr. Sikora executed a separate agreement assuming the lease for the office space on Murfreesboro Road. However, Dr. VanderPloeg remained secondarily liable for the lease payments. In addition, Dr. VanderPloeg stayed on as a consultant to the practice for sixty days following the sale under a collateral arrangement with Dr. Sikora. During this time, the practice continued to perform well, and new patient flow was satisfactory. However, as soon as Dr. VanderPloeg left, Dr. Sikora began making significant changes to the practice, and business dropped off sharply.3

In spite of the fact that the primary asset he had purchased from Dr. VanderPloeg was professional goodwill, Dr. Sikora changed the name of VanderPloeg Chiropractic to Absolute Care Chiropractic so that it would be listed first among the chiropractors in the Yellow Pages. He dismissed Dr. VanderPloeg's insurance clerk and receptionist and replaced them with his wife even though she lacked experience in these areas. He changed the professional atmosphere of the office by having his youngest child spend every workday at the office because he and his wife lacked childcare alternatives. Finally, Dr. Sikora relocated the practice to a less desirable building in a deteriorating neighborhood.

Dr. Sikora blamed Dr. VanderPloeg rather than himself for the decline in business. On February 12, 2002, he filed suit against Dr. VanderPloeg in the Circuit Court for Davidson County. Dr. Sikora alleged that Dr. VanderPloeg had falsely warranted that the practice had billings and collections of $257,952 and $146,609 respectively, for the six-month period from July through December 1999. He also alleged that Dr. VanderPloeg had violated his warranty to disclose all material or significant information known to him relating to his operation of the practice. Dr. VanderPloeg denied Dr. Sikora's allegations and counterclaimed to recover the unpaid lease payments on the office space following Dr. Sikora's abandonment of the premises.4

Following a three-day bench trial, the court entered an order on August 4, 2003 concluding that Dr. VanderPloeg breached his warranties to Dr. Sikora. The trial court acknowledged that the parties intended the billings and collections figures warranted in the purchase agreement to apply to the seven-month period from June through December 1999 instead of the six-month period from July through December 1999. Morover, the trial court found that the billings and collections figures contained in the purchase agreement were correct for June through December 1999 but not for July through December 1999.

Even though it was Dr. Sikora's lawyer, Mr. Khan, who inserted the incorrect dates into the purchase agreement, ...

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