A20-1212

This opinion is nonprecedential except as provided by
Minn. R. Civ. App. P. 136.01, subd. 1(c).

STATE OF MINNESOTA
IN COURT OF APPEALS
A20-1111
A20-1212

Patrice Nerad,
Appellant (A20-1111),
Plaintiff (A20-1212),

and

Frederic W. Knaak, et al.
Appellants (A20-1212),

vs.

Martin Chalupa, et al.,
Respondents,

Edina Realty, Inc., et al.,
Respondents.

Filed April 26, 2021
Affirmed
Kalitowski, Judge
*

Washington County District Court
File No. 82-CV-19-3614

Frederic W. Knaak, Craig J. Beuning, HKB Law, P.A., St. Paul, Minnesota (for appellant
Nerad)

John H. Brennan, Wayzata, Minnesota (for respondents Chalupa, et al.)

Standford P. Hill, Bassford Remele, P.A., Minneapolis, Minnesota (for respondents Edina
Realty, Inc., et al.)

*Retired judge of the Minnesot a Court of Appeals, servin g by appointment pursuant to
Minn. Const. art. VI, § 10.

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Considered and decided by Reyes, Presiding Judge; Worke, Judge; and Kalitowski,
Judge.
NONPRECEDENTIAL OPINION
KALITOWSKI, Judge
Following a dispute over the purchase of a home, appellants Patrice Nerad and
Frederick Knaak challenge the district court’s ruling that their claims were time-barred,
and that appellant Knaak, Nerad’s attorney, should be sanctioned for filing an action
challenging the arbitration agreement that was not supported by existing law. Because
appellants do not raise facts to toll the running of the 24-month period explicitly established
in the arbitration agreement, and a reasonable attorney would not interpret the agreement
as void, we affirm.
FACTS
This case concerns appellant Patrice Nerad’s purchase of a home from respondents
Martin and Patricia Chalupa. Edina Realty, Inc., and its agent Mike Diebel, also
respondents in this case, acted as dual agents in the transaction. On September 29, 2015,
Nerad digitally signed a purchase agreement to buy the Lake St. Croix Beach home from
the Chalupas, as well as signing a required disc losure statement, and a voluntary, binding
arbitration agreement. The arbitration agreement in part stated:
By agreeing to binding arbitration you give up your right to go
to court. By signing the [resi dential real property arbitration
agreement] on page two (2), you agree to binding arbitration
under the [residential real property arbitration system]
(“Arbitration System”) administ ered by National Center for
Dispute Settlement (“NCDS”). . . .

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. . . .

All disputes about or relati ng to disclosure of material
facts affecting the use or enjoyment of the property, excluding
disputes related to title issue, are subject to arbitration under
the [arbitration agreement]. This includes claims of fraud,
misrepresentation, warranty, and negligence. . . .

. . . .

A request for arbitration must be filed within 24 months
of the date of the closing on the property or else the claim
cannot be pursued. In some cases of fraud, a court or arbitrator
may extend the 24-month limitation period provided herein.

The transaction closed on October 28, 2015 for $138,000.
Following inspections that revealed nonpermitted work to the roof that resulted in
structural failures, as well as heightened le vels of mold in several areas of the house,
Nerad’s then-counsel wrote to both responde nts in September 2016, accusing them of
mispresenting the condition of the house and ac cusing Edina Realty of breaching their
fiduciary duties to Nerad. Respondents denied liability and all other claims and expressly
reminded Nerad of the arbitration agreement.
Nerad obtained new counsel, appellant Fr ederick Knaak, who in January 2018 wrote
to the respondents and initially denied that Nerad’s digital signature to the arbitration
agreement was valid. The respondents replied that according to the timestamps, Nerad had
signed all of the transactional documents with in 30 minutes. Respondents also notified
Knaak that pursuant to the valid arbitrati on agreement any claim arising out of the
transaction required arbitration and that respondents would seek bad faith attorney fees if
the claim was brought to district court.

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Nearly 16 months after the respondents’ warning, Knaak served respondents with
the summons and complaint in this matter. Respondents sent appellants 21-day safe harbor
letters as required by Minnesota Rule of Civil Procedure 11.03(a), and Minnesota Statutes
section 549.211, subdivi sion 4 (2020). The letters explai ned that under the arbitration
agreement, the district court lacked jurisdiction over the subj ect matter of the complaint,
and further that any action was time-barre d based upon the explicit 24-month limitation
period. Appellants did not dismiss or amend the action within 21 days, so respondents
moved for sanctions and to dismiss.
In Nerad’s written response to the motions to dismiss, Knaak argued in part that the
arbitration agreement phrase stat ing “[i]n some cases of fraud, a court or arbitrator may
extend the 24-month limitation period provided” means that cases of fraud are entirely
excluded from arbitration and instead of addressing issues raised in the motions to dismiss,
including that the claim was br ought in bad faith, or reques ting the court to toll the 24-
month limitation period, Knaak’s response addre ssed the merits of the underlying claim.
At the motion hearing in distri ct court, Knaak additionally argued that there was fraud in
the inducement of the purchase agreement, making the arbitra tion agreement, a separate
document, void.
The district court, after clarifying that the scope of the proceeding was limited to
determining whether the 24-month limitations period should be extended by the “discovery
rule,” found that the claims were time-barre d because the claims we re brought well after
the discovery of the potential fraud. The district court also found that the question of fraud
in the inducement was not properly before the court because it was not pleaded in the initial

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complaint, and dismissed the case for failure to state a claim. Additionally, the district
court concluded that no objective and reas onable attorney would read the arbitration
agreement and conclude that claims of fraud are exempt from arbitration, and sanctioned
Knaak for respondents’ attorn ey fees: $18,282.55 to Diebel and Edina Realty, Inc., and
$6,923 to the Chalupas.
Appellants separately appealed, and th is court consolidated the actions.
DECISION
I. The district court properly dismissed N erad’s claims for failure to state a claim
for which relief can be granted due to being time-barred.

Appellants argue that the district court erred by dismissing their claims, contending
that the complaint properly pleaded claims of fraudulent inducement of the arbitration
agreement. But the district court, in a well-reasoned decision, correctly limited its review
to whether the 24-month limitations period in the arbitration agreement should be extended
by applying the discovery rule to toll the period of discovery of the alleged fraud.
A party may move to dismiss based upon a claimant’s “failure to state a claim upon
which relief can be granted.” Minn. R. Civ. P. 12.02(e). A claim is legally sufficient “if it
is possible on any evidence which might be produced, consistent with the pleader’s theory,
to grant the relief demanded.” Walsh v. U.S. Bank, N.A. , 851 N.W.2d 598, 603 (Minn.
2014). “We accept the facts alle ged in the complaint as true and construe all reasonable
inferences in favor of the nonmoving party.” Id. at 606. We review de novo a district
court’s grant of a motion to dismiss for failure to state a claim. Abel v. Abbott Nw. Hosp.,
947 N.W.2d 58, 68 (Minn. 2020).

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In cases involving a statute or rule of limitations, dismissal is proper under rule
12.02(e) “only if it clearly and unequivocally appears from the face of the complaint that
the statute of limitations has run and only if the complaint contains no facts to toll that
running.” Pederson v. Am. Lutheran Church , 404 N.W.2d 887, 88 9 (Minn. App. 1987),
review denied (Minn. June 30, 1987). “Stated anot her way, at the preliminary motion to
dismiss stage of litigation, a court should cons true the complaint to allow the plaintiff’s
claim to go forward unless there is no way to construe the alleged facts—and the inferences
drawn from those facts—in support of the plaintiff’s claim.” Hansen v. U.S. Bank Nat’l
Ass’n, 934 N.W.2d 319, 326 (Minn. 2019). In Pederson, we held that because the accrual
of the plaintiff’s cause of action and the ex piration of the limitations period was evident
from the complaint’s allegations, it was reasona ble “to require that facts to support a
possible tolling of the limitations period appear on the face of the complaint.” Pederson,
404 N.W.2d at 889-90. Because the complain t contained “no facts to toll th[e] running”
of the statute, we concluded that the distri ct court correctly dismissed the complaint. Id.
at 889.
Here, appellants argue that because the ar bitration agreement a llows for a district
court to extend the 24-month period under the discovery rule, the district court erred in not
tolling the running of the arbitration period. The purpose of the discovery rule is to delay
the accrual of a cause of action bound by a statute or rule of limitation until the plaintiff
knew or should have known about the injury. Antone v. Mirviss , 720 N.W.2d 331, 335
(Minn. 2006). But Minnesota has rejected the discovery rule in favor of the “damage rule,”
under which the statute of limitations begins to run when “some” damage has occurred. Id.

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at 335-36. Therefore, we consider when the alleged harm to Nerad occurred, and toll the
24-month period from that date.
Here, the complaint acknowled ges that Nerad discovered the alleged fraud within
months of closing on the house, thus establishing a timeline that prevents appellants from
bringing this claim. In the light most favorable to the appellants, the latest date the tolling
could begin would be her then -counsel’s September 12, 2016 letter accusing respondents
of fraud and breach of fiduciary duty. The right to arbitration would have ended 24 months
later, on September 12, 2018, well before Knaak served respondents with a summons and
complaint on June 28, 2019. The complaint doe s not contain, nor do appellants raise in
their brief, facts to toll the running of the 24-month period explicitly established in the
arbitration agreement.
To persuade this court otherwise, a ppellants argue that the complaint properly
pleaded fraud in the inducement of the arbitration agreement, thus giving the district court
jurisdiction over disputes arising from the ar bitration and purchase agreements. This
argument, which was not made in the initial comp laint, is not properly before this court
because it was not timely raised in the district court. Thiele v. Stich, 425 N.W.2d 580, 582

(Minn. 1988).
Moreover, even if the arguments regardin g fraud in the inducement were properly
before this court, caselaw does not suppor t appellants’ contentions. The Minnesota
Supreme Court in Peggy Rose Revocable Trust v. Eppich stated that a claim of fraud in the
inducement was not properly before the cour t because it was not made in the initial
complaint. 640 N.W.2d 601, 607 n.7 (Minn. 2002). “To plead with particularity is to plead

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the ultimate facts or the facts constituting fraud.” H a r d i n C t y . S a v . B a n k v . H o u s . &
Redevelopment Auth. of Brainerd , 821 N.W.2d 184, 191 (Minn. 2012) (quotations
omitted). When describing fraudulent indu cement, the complaint only alleges that
respondents “purposely concealed from [Nerad] in order to induce her into the purchase of
the Subject Property,” with no reference to the arbitra tion agreement. (Emphasis added).
Here, appellants did not make an assertion of fraud in the inducement of the arbitration
agreement in the complaint, nor did they make that assertion in the arguments against the
respondent’s motions to dismiss.
Therefore, because appellants did not raise facts to toll the running of the 24-month
limitation period, the district court did not err in dismissing Nerad’s claims.
II. The district court did not abuse its discretion when awarding sanctions against
Knaak.

When an attorney or party presents pleadings or motion papers to the court, the
attorney certifies that the claims are not being presented for an improper purpose, such as
harassment; that they are supported by existing law or a nonfrivolous argument to change
the law; and that factual allegations or their denials have evidentiary support. Minn. Stat.
§ 549.211, subd. 2 (2020); Minn. R. Civ. P. 11.02. A district court may impose sanctions
against an attorney or a party who violates these requirements. Minn. Stat. § 549.211,
subd. 3 (2020); Minn. R. Civ. P. 11.03.
To award sanctions requires determini ng whether counsel had an objectively
reasonable basis for making the factual or legal claim. Uselman v. Uselman, 464 N.W.2d
130, 143 (Minn. 1990), superseded by statute on other grounds, Minn. Stat. § 549.21

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(1990) (repealed 1997). When evaluating this reasonableness standard, this court does not
focus on whether the arguing attorney personally believe s his challenged argument is
compelling, but whether “a competent attorney could form a reasonable belief that it arises
from the facts and law.” In re Adoption of T.A.M. , 791 N.W.2d 573, 579 (Minn. App.
2010) (quotation omitted). But the aim is to penalize only the filing of clearly meritless
claims, not the advancement of arguably merited claims or theories. Id.
Here, there was an explicit, bolded section in the arbitration agreement that said that
appellants had to file their request for arbitra tion within two years of closing or else the
claim could not be pursued. Although the agreement provided that in some cases a court
or arbitrator could extend the 24-month period in cases of fraud, appellants never filed a
demand for arbitration or requested that the period be extended. Instead, they brought
claims that were explicitly arbitrable to a district court after being warned before the period
had closed that arbitration was the proper avenue for remedy. An objectively reasonable
attorney would know not to br ing these claims to a district court. Filing an action after
expiration of the limitations period is sanctionable. Cole v. Star Tribune, 581 N.W.2d 364,
370-71 (Minn. App. 1998). And district court actions brought to circumvent arbitration
may support an award of atto rney fees as a sanction. Mears Park Holding Corp. v.
Morse/Diesel, Inc., 426 N.W.2d 214, 218-19 (Minn. App. 1988).
In this appeal, Knaak repeats his argum ents that the purch ase agreement and
arbitration clause were void and that the claims for fraud in the inducement were properly
pleaded. But these issues are not properly before us. Thiele, 425 N.W.2d at 582.

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Because it is objectively unreasonable to br ing explicitly arbitrable claims to a
district court instead of an ar bitrator, the district court di d not abuse its discretion when
sanctioning Knaak.
Affirmed.