In this episode, hosts Brad and Michael share the story of a physician seeking funding for a promising medical innovation. When financing options fell through, he turned to a CPA for a quick loan only to become trapped in a costly, long-term financial arrangement. Tune in to learn how thorough legal and financial due diligence can protect physicians and business owners from costly loan traps, hidden liabilities, and long-term financial setbacks.
Listen to the full episode using the player below, or by visiting one of the links below. Contact ByrdAdatto if you have any questions or would like to learn more.
Transcript
*The below transcript has been edited for readability.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd.
Michael: As a business and health care law firm, we meet a lot of interesting people and learn their amazing stories. This season’s theme is Unintended Consequences. Brad, we sometimes find ourselves in a situation, a situation that can be traced back to a seemingly inconsequential or unrelated decision.
Brad: Michael, before we jump into today’s story, I have a story. No, sorry. Make that two stories, that will make you wonder if we’re living in a sci-fi/comedy than real reality.
Michael: What is sci-fi comedy? Is that a Brad genre? Is that a recognized genre? I thought that science [00:01:00] fiction and comedy are mutually exclusive concepts.
Brad: No, they’re not. You can have sci-fi comedy and if it doesn’t exist, I’m going to start directing those movies. You heard it here, people.
Michael: What are the stories?
Brad: First up, we have California Bar exam. You would think passing the California Bar exam is hard enough. That’s what we heard.
Michael: That’s a horror story.
Brad: Yes, it’s grueling. Everyone says that it is. But now it turns out that AI helped draft some of the California Bar questions. The very exam that’s supposed to be screening our future lawyers was partially written by a large language module, and the kicker, non-lawyers had a hand in creating these questions. And the California Supreme Court didn’t even know AI was involved until after the fact.
Michael: Okay. Well, it’s kind of hard to follow the bouncing ball as to the details of what happened, but I did hear you, Brad. I heard AI, I heard non-lawyers and writing bar exams, and I think I heard without oversight. [00:02:00] Correct.
Brad: Good job. You’re listening. Get those ears on. And to really make it worse is that he questions it was writing were pretty confusing. The best part was none of these questions were even caught, and these mistakes that they, they wrote was actually messed up. Like, it didn’t make any sense the question versus what they could even give an answer to. And the criticism really started coming out after people started taking the bar. And then they actually spent some time further analyzing it.
Michael: I guess doing some hallucinating, as they say; AI is not quite ready for drafting the California bar exam. Well, at least as of now. But I’m sure by the time this episode’s dropped, it’ll have figured it out.
Brad: So by next week, no doubt. Or maybe Michael, AI is just better writing really confusing questions than most humans. But either way, it’s a prime example of some unintended consequences where humans were relying too much on AI for a critical task here.
Michael: [00:03:00] Okay. Well, Brad, let the game come to you a little bit more. I think you’re forcing it to try to turn that into an unintended consequence story.
Brad: I saw I had a circle and a square.
Michael: What’s the second story?
Brad: Yes. The second one comes to us out of our friends down in Australia. We had recently an Australian on, so I thought this would be a good one to bring back at our Australian accent gentleman’s, but Australian radio station that introduced a new DJ named Ty. She curated four hours of music a day for six months. listeners loved her. She sounded perfect. They sent her fan mail and Facebook stuff and all the other kind of fun things you do when you’re goofing over somebody. But then the station got caught. Michael, turns out Ty was a robot—was AI.
Michael: Oh, well, I guess some fans may have felt a bit betrayed, maybe.
Brad: Probably. Yeah. Yeah. And the station retired Ty and apologized, but then the fans said they wanted Ty back and Ty is now back. Well, and maybe not physically, obviously, because it’s AI, but you get the point. The thing is, [00:04:00] I think we’re starting to cross over a line where AI is more authentic than what we perceive them to be. Once you get comfortable with AI voices and personalities, maybe there’s some more unintended consequences starting to pile up here, Michael.
Michael: Oh man. My brain cannot quite comprehend the thought that we will start to connect with and trust a computer.
Brad: Yes. You might start losing track on what’s real, what’s programmed, what’s just good old human mistakes.
Michael: All right. So Brad, are we headed towards a world where our radio DJs are robots and our lawyers are AI? Or do we need to set some boundaries before this goes full sci-fi?
Brad: Well, Michael, I don’t know. Am I a robot? I can’t tell. Maybe I’m not. But to your question, I think for our audience, they probably know this; technology is just a tool and as fantastic or as dangerous as it can be used, if you’re using it blindly. But today, AI is really helping draft test questions and spinning tunes tomorrow. Who knows? [00:05:00] Maybe we could be doing things like practicing law or practicing doctor stuff, or just putting in a virtual world.
Michael: Okay. Well does this opening have anything to do with today’s story?
Brad: Yeah, Mike.
Michael: Okay. Well, that’s vague. Objection. Let’s get into it.
Brad: Michael, today’s story starts off nearly 15 years ago.
Michael: Does that mean I get a lot of context? Nope,
Brad: Nope, that’s it. That’s all the context you get. No, of course not, Michael, I’m going to give you some more context.
Michael: Nice. Okay.
Brad: So there was a super hardworking young doctor, we’ll just call him Dr. Carl Ramirez. And Carl was all about practicing medicine, fixing people up, saving lives like a good doctor, right? But he also was super focused and on a bigger dream about building a groundbreaking medical innovation with some other younger doctors that he worked with.
Michael: So that’s not too uncommon in particularly some specialties you’ll see even more innovation, but you’ll find, because so many [00:06:00] doctors obviously have that science background, that they’re hardwired for innovation and it becomes a part of their career track in addition to treating patients where they’re trying to come up with a new device or some other sort of medical invention. So what got in the way?
Brad: Well, money or funding, depending on you want to say it, but back then, getting grants from the NIH or the National Science Foundation was extremely difficult, if not impossible, especially for some younger doctors. The NIH at the time really was focused on more big lab, big box places, mostly on the east coast. And our guy Carl he’s in sunny, nice California, and he’s just trying to make things happen over there.
Michael: Okay. Well that sounds like a potential roadblock.
Brad: Yeah, it was. And it was real tough for them. Carl had started a small startup with some other younger doctors, remember they were all putting this thing together and they were making progress, and they needed [00:07:00] some money, so they went to their friends and family first and got that money. But as they were progressing, they really needed a quick loan. And although at the time it was $40,000 they needed, and they didn’t have to really complete this project and move the invention forward. And based on, a lot of times with these things, you have federal research timing, and they were up against it pretty hard. So Carl met the CPA, we’ll call him Mr. Ty, and he was not a banker investor, just again, a CPA. Mr. Ty was very polished, very nice suits, super nice guy, very amicable to speak with. And Carl thought, “Oh, cool, this guy’s awesome from California. And he said he could help us out.”
Michael: Well, I have a lot of questions.
Brad: Okay.
Michael: Is that okay?
Brad: Yeah.
Michael: First of all, well, I’ll have to acknowledge Mr. Ty, so see the shout out to your earlier robot.
Brad: Told you it was coming together.
Michael: Oh, okay. And then you said CPA, so I could see why CPA is helpful [00:08:00] in a startup business for accounting and taxes, but you’re talking about handling a loan. I’m having a hard time connecting the dots where the CPA is going to be helping with that part of the process.
Brad: Yep. We’ll stay on, we’ll see what happens here. Now, Carl was focused on this research and his practice, so really didn’t have time to learn much about going out and getting bank loans or what the lending world was like. And after speaking with Mr. Ty, he seemed, again, very trustworthy CPA, friendly guy and good reputation.
Michael: He’s still a CPA, and I do have to ask, was he a robot?
Brad: Well, it’s a good question. No, he actually was not a robot. He was a human being He sounded—well, not like a DJ. But fair question though, with the start of the story. Mr. Ty tells Carl, “Hey, I’ll take care of everything including finding the right bank and I’ll get all the funds you need to get this loan going.” [00:09:00]
Michael: He may be a real person, Brad, but a CPA taking on this role is odd. I mean, talk about turnkey services. It’s hard for me to wrap my brain around the thought that the CPA is helping spearhead this funding.
Brad: And I should be clear, this is not their CPA.
Michael: This is a CPA.
Brad: This is a CPA. Correct.
Michael: That he met.
Brad: That he met, right.
Michael: But that he dressed well.
Brad: He did. He seemed really nice too. Now, Mr. Ty told Carl that he had secured a loan and this was a good deal. Again, this is what the CPA told him. Ty told Carl that it was a small interest rate of just 12% from the bank. And to help speed up the process, Ty himself, the nice CPA would go borrow it himself, if Carl would just pay Ty an extra 2% they could do this. Well, Carl liked this. Great, let’s go. He didn’t have time, so go and do it. So Carl, via Mr. Ty executed [00:10:00] a bunch of paperwork to borrow $40,000 from the bank to keep in invention moving forward to make these federal deadlines.
Michael: So those who are listening and not watching, Brad used some very big air quotes, what around the word bank just then. Am I hearing you right, that Mr. Ty was going to borrow the money from the bank and then upcharge a little juice to Carl?
Brad: Just a little juice.
Michael: 2%.
Brad: 2%. And maybe with the air quotes, maybe I was foreshadowing something. So after a while Carl noticed the terms of the loan weren’t quite the same. It turns out that Mr. Ty kept changing the contract and renewing this bank loan like every three to six months, really, without telling Carl and the group that he was up to. And each renewal seemed to change the interest rate even more. And now [00:11:00] every time Carl had to make a payment, it was somewhere between $7,000 to $10,000 every time, just to make payments on the loan.
Michael: Well, that’s the CPA special I guess. I mean, an audience, I’m sure you’re picking up on the fact that this sounds pretty fishy because it does just a little context. On a normal commercial loan when you go borrow money from the bank, I mean, it is not so wishy-washy. I mean, you have terms and there’s an underwriting process, and they take security on it. And then when you borrow the money, you know what your interest rates are going to be, and even if you have variable interest rates, there’s a way to that that’s calculated and determined. And so, there is a lot more certainty and formality to a commercial loan than a whatever this is – CPA loan. [00:12:00]
Brad: I mean, I don’t know what you’re talking about, Michael. That sounds very normal sounding. Furthermore, what Carl didn’t know is that Ty actually at one point bought the loan for the bank and he was the one charging for all the interest rate and now I cranked it up to 20%.
Michael: Okay. Well, there’s a law called usury. Did you learn about it, Brad?
Brad: No. That sounds like a fancy term though.
Michael: Yeah, it’s very fancy. It’s basically a law that caps how much interest you can charge on a loan, and so you’ll see for those that have had a credit card, that it’ll be like 18% or the maximum amount allowed by law. Well, I don’t know what the usury law is in California, but 20% is like creeping up into that range.
Brad: Yeah, agree. And at this point, let’s fast forward over the course of 15 years Carl had paid at this point $85,000. Yes, audience members. [00:13:00] That’s the exact number, 85,000. And yet, Mr. Ty kept asking for more.
Michael: So he borrowed 40.
Brad: Yes.
Michael: And he’s paid 85, and it’s still going. When did we get involved? Hopefully you didn’t help him with the original loan.
Brad: You mean make the introduction to the nice CPA? The original loan?
Michael: Please tell me no.
Brad: Either one. So Carl called me and asked if we could assist as they wanted to grow their company. And it was recommended through a mutual physician they knew, and they went to another bank to actually get a loan. And they found out that Mr. Ty had filed something called a UCC against Carl’s business.
Michael: Yeah. So this is a kind of a vocabulary word. A UCC is a formal filing, it’s a public filing where when a party claims that it [00:14:00] has a security interest in the assets of another or another’s business, they can file this. And when someone else is going to loan money, they can run a UCC search and see that, oh wow, these assets are tied up, which means that you’re second in line or worse, to be able to recover on that security. So it makes it extremely difficult to borrow money if your asset is already pledged elsewhere.
Brad: Yeah. And another follow up on that audience is, they can see that the assets are locked up. They don’t know what the payoff amount is for you to get that UCC release. So a lot of times you can see it. And then you reached out to the – and that’s exactly what happened here. Carl reached out to Mr. Ty and said, “Hey, we’re going to go to another bank. What would be the payoff amount to get this UCC release so we can go borrow money from the bank and get you paid in full.” And Ty told him it would be $120,000.
Michael: What? So he’s paid 85 grand. He borrowed 40. [00:15:00] And to get out from under this, he was going to have to pay 120. How did the principal get that high?
Brad: Michael, it’s a mystery. And as you can imagine, Carl and his team just really, they wanted to get out of this loan with Mr. Ty. And finally they just wanted to get rid of this super nice CPA and what they realized is they didn’t really mean a nice CPA, they actually met a loan shark.
Michael: Yeah, I mean, I guess I’m glad that Carl didn’t get his legs broken for not paying the interest payments.
Brad: Man, the story’s not over yet.
Michael: Alright, let’s go into commercial, and on the other side, we can learn a little bit more about what happened to Carl and this crazy loan.
Access+: Many business owners use legal counsel as a last resort, rather than as a proactive tool that can further their success. Why? For most, it’s the fear of unknown legal costs. [00:16:00] ByrdAdatto’s Access+ program makes it possible for you to get the ongoing legal assistance you need for one predictable monthly fee, that gives you unlimited phone and email access to the legal team so you can receive feedback on legal concerns as they arise. Access+, a smarter, simpler way to access legal services. Find out more, visit byrdadatto.com today.
Brad: Well welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto, with my co-host, Michael Byrd. Now Michael, audience members, for those who don’t know this season, our theme is Unintended Consequences. And Michael, before you kind of do a summary for the story, we were just talking during the commercial break and I was explaining to Kennedy who’s off? We can’t see Kennedy, but she’s right there, I promise audience members – that as crazy so far as this sounds, this is all completely true, which is why even your reaction to the 85, that’s how insane things were that when I started reading through this, [00:17:00] I didn’t believe it at first until we can tell more of the story.
Michael: That’s crazy. Yeah. I mean, quick recap. We have Mr. Ty, the slick, handsome CPA, did you say handsome or did I just insert that?
Brad: I think you just added that too.
Michael: Well-dressed. Okay, I’m picturing someone quite handsome. I don’t know why.
Brad: Why’d you say that when you looked at me at the same time? Thank you, Michael.
Michael: I was glaring at you. So we have Mr. Ty, who’s a real person, not a robot, and he is a CPA and he somehow gets connected to our client, Dr. Carl. And Dr. Carl is a young doctor, starts a business, he has some ideas for inventions, and he’s trying to get the initial funding out at the beginning of his career. And Mr. Ty says he can help him and Mr. Ty through some sleight of hand or something, magically goes and borrows the money himself, [00:18:00] and then loans the money over to our client and just keeps jacking up the interest payments and interest rates, and by the time we become involved, Dr. Carl’s paid $85,000 on a $40,000 loan and is told soon after that he has $120,000 payoff just to get Mr. Ty out of his life. Did I get it?
Brad: You did great. And I know audience, it does sound crazy, but I have the emails, and documents, which we’ll talk about in a second. But you know, Michael, before we get back into the actual story, let’s take another giant step back here. You started kind of alluding to this earlier, but you know, in your typical commercial bank, what do you need to – what does the bank need to lend you money?
Michael: Well, a bank is going to need [00:19:00] a ton of security, including your firstborn
Brad: No, no, Michael, that appears what loan sharks need. For our audience, let’s spend a few minutes really unpacking what’s truly needed to take out a loan?
Michael: Yeah. And I alluded to this a little bit earlier when I was talking about the formality of a bank writing a loan. I mean, they’re held accountable by laws and regulations that govern loaning money. But if you really just kind of simplify it, they’re trying to figure out how you’re going to repay it. And if you’re a startup business that has no revenues they’re going to assume that if you fail, they’ll need to know how they’ll be repaid. That’s how they’re going to look at it. It’s a worst case scenario. They’re going to look at assets. Are there assets that they can provide or get security around? And if not, then a personal guarantee from people who have the means to pay back the loan in case it doesn’t work. [00:20:00] And so, I mean, you’re start talking about what does that look like in terms of documentation? And there’s personal and business financial statements. They’re going to ask for balance sheets, income statements, cash flow statements, two to three years of tax returns, and of course a business plan to actually see that you have some sort of a plan to become a profitable business. And so it is, as you and I experienced when we started the firm, a painful process to try to convince someone that you’re worthy to loan money. It’s not as simple as a good looking CPA saying, I’ll just go get the money for you.
Brad: I mean, you sound like an ATM machine where I just walk up and put my card in, I just get $40,000 out.
Michael: Yeah, exactly. It’s not quite like that.
Brad: Yeah. And to Michael’s point, to really kickstart [00:21:00] this entire loan process, there’s a lot of documentation that the bank’s going to ask for. Not just, Michael was talking about the financials, but they’re going to start looking for what are your legal documents look like from the deal that you already have? Who are these other people that lent you money? Or are they people that could also jump into the deal? And then there could be other things depending on your business. They want to know is there a business license association or certain registrations or certificates that you need? What are your articles of incorporation or certificate formations look like? What do your operating or partnership agreements say? They’re going to want all those details. So when it’s, again, to Michael’s point, is not only they look at the financial pieces, but they’re going to want to know all the other controlling elements. And especially with the invention type, like what does that invention look like? Did you go and get it patented yet? Where are you in that process, if at all? Because they’re trying to figure out how secure is this idea.
Michael: [00:22:00] And you said something that touches on, I mentioned the personal guarantees a moment ago. You talked about how they’re going to look at the ownership. As a general rule for most types of loans from most banks, if you’re an owner and you own 20% or more of the business, you can expect that they’re going to ask for a personal guarantee. Which means that most often you’re personally liable, but that, again, there’s some nuance there. Are you personally liable for some portion of it or for the whole thing? And so, there’s a lot of risk that’s being put on the table when you’re borrowing. And then just from a detail, understand that the bank was going to run a credit report on these individuals to make sure that everyone pays their bills.
Brad: Why didn’t you know that? That sounds like personal?
Michael: Well, you need to go see Mr. Ty.
Brad: Okay. So let’s fast forward a little bit here. [00:23:00] Once they do approve the loan, let’s say that everything looks great, Michael and they want to get ready to go execute these agreements. What type of agreements or other corresponding documents should they recognize? You already mentioned personal guarantees, but what does that look like?
Michael: Yeah, I mean, we’ve touched on a lot of it already, and the personal guarantees are a big part from a personal risk perspective. You’re going to have your, as I mentioned, your loan documents. This is the document that you’re borrowing the money, and then there’s going to be security documents where you’re pledging assets. And there may be other documents that have conditions in it that are based on performance metrics of the business that give the bank certain rights. And so, it’s pretty intense. It can be a little bit of a mistake just to think that it’s bank loans and you can’t negotiate, so you just sign it because there are some things in there that you can go back and forth with. But I’m curious, [00:24:00] Brad, what documents did we review and was the loan even with an actual bank?
Brad: Well, what we did discover a bank was involved, but in this case, Mr. Ty was the bank.
Michael: The Bank of Ty?
Brad: The Bank of Ty. It was not AI, – well it was an AI bank because it really didn’t exist. Well, we later learned that he was getting some kind of referral fee when he would create these loans. And each time he renegotiated with the bank for a new loan, he was getting paid this additional fee, which eventually, as we learned also meant that he eventually just bought the loan itself and he was the bank.
Michael: Man, this is so shady.
Brad: Yeah. It’s very shady, audience members. And when he bought the loan, he really, and cranked up this interest rate. None of this was disclosed obviously, to the investors or to our client, Dr. Carl here because obviously he’s very busy being a full-time doctor. And he also, when he wasn’t doctoring, he was working on this invention. [00:25:00]
Michael: Yeah. I mean, some might call that fraud, Brad. I mean, I don’t know, fraud with the orange jumpsuit kind of fraud.
Brad: Yeah, fair point. I think kind of since we’re at this point, we’re probably, audience members really want to know what happens next. At first, Carl really was too embarrassed to do anything when he started considering what to do with this loan, right? Like, he didn’t know. He wanted to get rid of it, but he didn’t know what to do with it. So unfortunately based on the stuff that we had, we actually made some introductions to some great litigation attorneys because we saw was very problematic because we really wanted to help get him out of this obscene loan, which probably wasn’t enforceable at the end of the day, based on so many factors, including some fraudulent stuff. But sometimes, again, clients get so caught up in the world of like, I just want to get rid of it. I think the words he used is like, “Well, they just kind of, [00:26:00] he knew that we wouldn’t know any better because we’re doctors kind of thing.” He really didn’t want to spend any more money to get out of this “simple loan” that Mr. Ty had found for him, but they did, and the loan was eventually terminated based on lots of negotiations to get them there.
Michael: And did they report this CPA to his board or to anyone?
Brad: Again, no, they didn’t because they were embarrassed. The sad part of it, audience members, is when this whole thing started, going back to your point, did we help them in the beginning? No, we didn’t because if they had reached out to us, we would’ve told them the typical process to go through to get a loan, and the things that you do and the typical documentations we see when someone is taking out a true commercial loan or even a loan to, from an individual. None of these documentations that you typically see really existed. And second, audience members, we actually knew Mr. Ty. [00:27:00] Believe it or not, he actually had defrauded more than one of our clients through some other type of scheme. He didn’t always do the loan schemes, but he’s done other kind of back handed situations, and it basically was his MO, because when the conversation started with the client and mentioned the CPA’s name, I actually knew this person immediately. I was like, “Oh, this is not going to end well,” as Dr. Carl kept unpacking the story because we knew his MO.
Michael: Did you verbally say ding when he said Mr. Ty’s name on the call?
Brad: In my brain, I definitely, there was lots of dings, like, oh no.
Michael: All right. Well, we’re getting to the end. What are your final thoughts, Brad?
Brad: I mean, obviously a story of a lot of unintended consequences here. and it’s unfortunate because it’s a situation where you have this shark that’s preying on these poor physicians because the shark [00:28:00] knew that they didn’t know what they were getting themselves into. So I guess really the first takeaway here is, understand the fine print. If you don’t understand it, hire an outside party who can actually look at it because in this case, Mr. Ty was acting as the bank. They shouldn’t, not that he couldn’t trust the person who’s helping it, but someone else should have looked them over. Second, by focusing on this short term gain of getting this infusion cash, they really failed to think about the long term impact of co-borrowing. In this case, money was someone they just really had met. They really didn’t know the CPA well at all, and so that actually obviously dragged them down, to your point. This is not their current CPA, this is someone they just met through a word of mouth kind of situation. But Michael, as we’re wrapping up, what are your final thoughts?
Michael: We started the episode you’re telling me the story about Ty, the DJ, and it just kind of opens the mind of all the potential negative possibilities with AI [00:29:00] and these people formed a connection and trust to something that was not real, and just what does that mean for us in the future? Because we can see the age old, that there’s bad people out there and it’s such a cautionary tale that someone that shows up in a suit that you just met and tells you things you want to hear, oh, I guess he’s handsome as well. Or I interjected that part. That feeling of a connection that you may have had and trust is not well placed either, and that there needs to be a little bit more substance before you put your business at stake and put take on that kind of risk.
Brad: Sounds like a trust but verified moment. But audience members, that’s all the time we have today. And next Wednesday, we’ll continue this journey of talking about Unintended Consequences when we [00:30:00] bring in special guests, Dr. David Boudreault. Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com.
Outro: ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.
