In this episode, hosts Brad and Michael share the story of a group of Texas plastic surgeons who restructured their practice using multiple entities. While their goal was to protect themselves from liability while expanding operations, a seemingly small misstep led to a lawsuit putting their personal finances at risk. Tune in to learn how to properly structure entities like limited partnerships and LLCs, and the essential legal formalities needed to protect your business and assets.
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: Well, welcome back to another episode of Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, 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 that can be traced back to a seemingly inconsequential or unrelated decision.
Brad: And Michael, I have a very important question to ask you. Have you ever thought about mouth taping?
Michael: Yes. Mouth taping has crossed my mind to do to you before every podcast.
Brad: That’s not fair.
Michael: I don’t even know that I’ve ever used that term mouth taping before. Where are you going with that?
Brad: Well, it turns out [00:01:00] people are taping their mouth shut at night. Apparently, the idea is to prevent mouth breathing, encouraging nasal breathing, and that you’re going to get a better night’s sleep.
Michael: I feel dumber for learning that this exists, Brad. Has there been any study done? Anything?
Brad: Well, I mean, when you say study, there’s been a little bit of research out there, like emphasize a little bit like on TikTok. It’s a TikTok trend, Michael. So these influencers saying it is life changing. Is that good research?
Michael: Well, yeah. I mean, TikTok is primary authority these days, obviously, probably cite to it in law school. But I guess we should all run out and buy some duct tape and maybe pop in a Tide pod to eat right before we tape our mouth shut.
Brad: Yes. Good idea. With the Tide Pod there, except the kicker apparently is shocking news, Michael. It actually can be bad for you. I was reading [00:02:00] about another small amount of people holding their mouth closed and it was having trouble breathing. It’s actually making it worse, and I know it kind of sounds weird.
Michael: Yeah, that’s a shocker. How could that possibly be bad for you? Closing out the ability to breathe out of your mouth. What could go wrong? Tell me there’s not a doctor behind all this.
Brad: Yeah, that’s true about the influencers haven’t really set up a particular doctor. They do recommend that you speak with the physician before mouth taping. But think about this, Michael, let’s jump into our movie talk here real quick, which is usually another bad source of good information. But when someone’s kidnapped, they tape their victim’s mouths. And we can all agree that kidnapping is bad. But however, according to TikTok world, the good news is that if your mouth is taped shut, you might have from a healthy perspective, you can breathe through your nose better now.
Michael: Okay. You started to lose me, man. Trying to take TikTok mouth tape and kidnapping somehow. [00:03:00] At this point, I just would want to find a way to unlearn our last few minutes.
Brad: Yeah, it got kind of dark there, didn’t it? All right. I do not condone or recommend anyone kidnap anyone or think it’s a healthy activity, so I should say that. And speaking of unhealthy activities, I did also read that it’s potentially dangerous for people to use sedatives or alcohol while mouth taping. This does just start to feel like they’re begging for a Darwin Award here.
Michael: Well, that’s a name I haven’t heard for a while. Whatever happened to the Darwin Awards? I feel like years ago we talked about those a lot more. I feel like I would get emails regularly with the latest updated Darwin Awards. I think that might be a deep dive for a topic for one of our future shows like that. But kind of back to, what about the liability for these influencers that are promoting these potentially harmful practices?
Brad: I don’t know. It’s a pretty good question.[00:04:00] I’m assuming everything at TikTok, there’s a lot of liabilities there, but maybe they need a disclaimer that says, “You may die if you tape your mouth shut while you sleep.”
Michael: I can’t believe I’m getting sucked into this. I’m about to offer a thought on risk mitigation strategy to taping your mouth shut. But at the very least, there should be an understanding of the potential risk and a clear recommendation to consult with a health care professional, which I think you said some of these do that.
Brad: Yeah, I agree. It does seem weird to note that a person should consult with a medical professional before they tape their mouth shut. And doing so, I think most things in the TikTok world, you probably should consult with the health care professional first.
Michael: Well, before we get into today’s story, I just want to tell the audience, “you’re welcome” for the last five minutes. I hope that made your life better.
Brad: Well, there are some people out there that might have been wondering, [00:05:00] “Should I do this TikTok trend?” And maybe we put that to bed.
Michael: And maybe we saved a life, Brad. All right, let’s jump in.
Brad: All right. Today we’re diving into topic that’s near and dear to our hearts, Michael; protecting physicians from liability.
Michael: Okay. Level one, do not tell a patient to tape their mouth shut to sleep better .
Brad: Well, that’s a good one. You just came up with that, didn’t you?
Michael: Yeah. I want to give good sound legal advice. But seriously, and getting to the real protecting physicians from liability discussion. A lot of times when we lecture on this, well, there’s kind of three main areas where physicians face liability. Of course, you have to start with your patients and then you move on to your employees or your staff. And then one thing that many have learned is that this is such a heavily regulated industry, is that the government is [00:06:00] a big potential liability. All good for a physician.
Brad: Good points, Michael. Maybe give our listeners who are new to this a brief overview of these three liability areas you just kind of outlined.
Michael: So start where I left off with government liability. What are those risks? They can stem from regulatory compliance issues, fraud and abuse violations, HIPAA breaches, they kind of show up at the state level and medical board complaints or state and other agencies at the state level. And of course there’s sometimes federal risk. Staff liability, we’re talking about employment law; employment disputes, workplace safety issues. So there’s a whole body of law that protects the rights of employees that creates risk. And then patient liability, we’re talking about standard of care, medical malpractice risk primarily. But they also have patient privacy rights that [00:07:00] creates risk to the doctors.
Brad: Great summary. I think you said this earlier, but you have been paying attention while speaking or doing your podcasting. Because it sounds like you did this before, Michael. So, good job. Now let’s take our listeners on our journey back to the dark ages, Michael, of medical malpractice claims. Back even before Michael, you were even practicing law.
Michael: Wow. That was a long time ago. So we’re going back to the last century.
Brad: Yes, we are. I’m talking about the 1980s. And although the Dark Ages did go through the early two thousands and many states, this is where for audience members, physicians were getting hit with really large malpractice claims left and right. And many doctors felt that the claim was way out of proportion to the actual harm done to the patient.
Michael: And to be fair and owed to our clients who may be in a state like Florida, there are still some areas of the country where this risk continues. So we’re not ignoring that. But to your point, Brad, the dark ages were different even than the riskiest places today. [00:08:00] Those were super challenging times for health care providers and a lot of angst in the doctor attorney relationship.
Brad: Yeah, no doubt. So today’s story, there’s a group of plastic surgeons in Texas. They were really fed up with the threat that their partners potentially were causing them liability issues which obviously brought them down the whole group for one thing that an individual did. So they decided to actually break up their practice, and they actually each formed a separate medical practice complete with their own businesses, websites, and staff.
Michael: Let me guess. They still wanted to work together in some capacity.
Brad: You are catching on quick, Michael Byrd.
Michael: That’s the tie.
Brad: Yeah. I mean, for those watching or don’t see, but Michael, he’s dressed to the nines today for this podcast. He wants to really show off his learner’s abilities. So, good job, Michael. Now you’re correct. They did want to still work together, and that’s when they formed something called an MSO, Michael. [00:09:00] Why don’t you explain to our listeners who are not familiar with that term what an MSO is?
Michael: MSO is a management services organization. We’ve talked about it a bunch on this show over the years. MSO is a legal entity that provides administrative and management services to health care providers. It allows in a situation like we’re talking about here, independent practices to share resources and collaborate while kind of maintaining their autonomy. We actually wrote that M&A field guide and talk about this as the glue plan.
Brad: That’s right. Look at Michael Byrd dropping some knowledge. That tie is making you smarter, isn’t it?
Michael: I think it is.
Brad: All right. Now, the setup seemed to work well for years. The group grew and they added additional physician partners. They also explored new opportunities for expansion. One of these expansion ideas was to develop a real estate holding company to buy and or lease [00:10:00] all their clinical locations.
Michael: Okay. That’s adding a layer of sophistication in their growth. But tell me, what kind of entity do they use for this real estate venture?
Brad: So they formed a limited partnership or LP, as we call it on the streets. And Michael, can you explain why it is recommended that they need two different entities when they do put together an LP?
Michael: So the construct of a limited partnership is that it’s getting a little bit into the law – the partnership laws that are in place in a state. Most states have a limited partnership. So it builds this idea that you can have a general partner and limited partners, and the limited partners have liability protection from the liabilities of the partnership. So the key, going back to your question is you have this general partner that is required [00:11:00] as a part of a limited partnership, and the GP is typically a separate entity, often an LLC, but some form of an entity because the GP is jointly liable with the partnership. So if the partnership has a liability, then they can go after the GP. So make the GP an LLC, usually the GP doesn’t really have any assets inside of it so it’s really a control vehicle. And so there’s not as much risk on this kind of joint liability. Now, the limited partners is usually the individual physicians, and so as I said, they have a limited liability protection. And it’s a pretty strong protection. This has been a really common entity in Texas and other states for real estate deals. In Texas, there’s a lot of old Texas kind of franchise tax laws [00:12:00] that offered some benefits to this structure.
Brad: Yeah. So pretty common. And as Michael was saying, I think important for audience members to understand. The GP in this case, which was an LLC, it has unlimited personal liability, which is why you don’t want it to be an individual. You want it to be an entity. While the limited partners, as you said, will have certain liabilities, but very limited. And now because we have these separate entities, the physician believed they were protected based on how you were describing the setup. So from their own individual liability, their CEO was out negotiating all the business deals and including the leases. And in this case, they executed a lease without a second thought,
Michael: A sense of but coming there, Brad.
Brad: Oh no. I think you’re hanging out with me too much, Michael. Starting to learn my ways. Now let’s fast forward about four years. The practice did enter into release in a new location, but they no longer needed that space because they acquired this space where some physicians [00:13:00] in a kind of satellite location, and those physicians that were working at satellite location, they left the practice. So it sat empty for like 12 months. The CEO kept trying to sublease it or negotiate a buyout. But unfortunately, they got no dice.
Michael: So what did they do?
Brad: Well, they were fed up paying for this unused space in the satellite and these savvy doctors decide to breach the lease. They felt confident that only the LP and the GP would be liable, but not them personally.
Michael: I think I can see where this is going.
Brad: God, he’s good Kennedy. He’s pretty good today. It’s that tie. Yes. Michael, to your point, it is not a surprise that there was a twist. The landlord sued not just the GP and the limited partnership, but they also sued each physician owner and their individual capacity.
Michael: [00:14:00] Okay. Now that’s getting confusing. I thought the whole point of the LP structure was to protect the individual physicians from this personal liability.
Brad: You would think so, Michael, right. That was the whole purpose of your entire great description beforehand as to why you have a GP and an LP. But Michael, this is where things kind of got interesting. The landlord’s attorney argued that on this particular lease, all the limited partners had signed individually along with the GP.
Michael: Oh, no.
Brad: Oh yes. And audience members, by signing the lease personally, the landlord’s lawyer was arguing that these physicians inadvertently, but exposed themselves to liability for breach of contract and basically were personal guarantees on the lease as the doctors were not required to sign this lease, only the GP was on behalf of the LP. It was a fact that these doctors really never considered [00:15:00]. When they just saw their name, they wrote down, sign their name, and they weren’t even thinking about it. So the landlord just kept arguing that they were personal guarantors because they had signed. And to be clear, this lease was written between the landlord and the LP and not with any other party. So it wasn’t like they were named up anywhere else. It was not clear as to why the doctors needed to sign the lease because they were not personal guarantors of the lease, nor was there a personal guarantee in the lease.
Michael: Let’s just start with this. Signature blocks can be devastating for circumstances like this. And the fact that they signed – Whatever theory there is that their signature showed up on that lease creates exposure in some way. It becomes critical. Okay, well why and how did they sign? And if it was just a blank signature, I mean, there’s any [00:16:00] number of arguments that could be made if they just sign their names. But another factor is, let’s say that they signed as limited partners. And what I mean by that is that it had their name and then kind of underneath it they had the words limited partner or something that showed the capacity by which they’re signing. There’s a ton of risks there because one of the things in Texas, and in many states when you’re a limited partner, to maintain the protection of being a limited partner, you have to refrain from doing certain things. One of the things is kind of acting on behalf of the partnership and it gets into more detail than that. But if you’re signing a lease on behalf of a limited partner, you probably are breaking the rules on what you can do as a limited partner. And the consequences of that [00:17:00] is that you become a general partner which then means you’re jointly liable.
Brad: And for audience members to understand that many times with like commercial leases and or with you’re taking out a loan, there will be times that you have 10 or 15 different entities showing up. But they may still ask the individual to personally guarantee it. And in this particular lease, there was not one.
Michael: Yeah. So yeah, to your point, signature shows up, that’s a problem no matter what. There’s some technicality on, you know, is there a personal guarantee with that page where the signature show up versus on where the tenant signs and kind of either way you got a problem, if it’s not. I’s dotted and t’s crossed?
Brad: Absolutely. And this lawsuit, as you can tell, put each physician’s personal assets at risk, which is the entire reason, Michael, why they had all these separate entities.
Michael: Oh, man. All right. Let’s go into commercial and when we get back, let’s talk about [00:18:00] what happened and some other lessons learned.
Ad: 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. 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: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto, with my co-host, Michael Byrd. And Michael, for those that don’t know this season, our theme is Unintended Consequences.
Michael: Yes. And today we have a story about some docs – they’re nameless today, so we’ll just refer to…
Brad: They want to remain nameless after the story.
Michael: Anonymous, yes. So we have some [00:19:00] doctors who had kind of gone into a limited partnership vehicle for purposes of kind of holding their real estate. In this case, they just ended up deciding to lease some property. So it worked until it didn’t and what happened was they decided they didn’t need the space. They decided that they were going to flex their protection they had under their being limited partners, and the fact that they didn’t sign a personal guarantee and just walk the lease. The problem was, as we discovered is that they had signed their names to the lease and it was just like – Picture the lease, the tenant signing, and it has the general partner’s signature block, but then it just lists all the doctors below it and they all signed it. So that’s a problem and that’s kind of where we left off, is that we had a problem on our hands.
Brad: And Michael, before we jump in back [00:20:00] to today’s story, let’s take another step back here for our audience’s help here and understand reasons why doctors would even develop these complex models. What was – going back to kind of what was said earlier, why would you do that in the first place?
Michael: Yeah. I mean, you do liability protection and asset protection. There’s kind of two things. So from a liability protection perspective, you’ve got this lease, which creates an obligation that they breached. So that creates obligations. Well, if you have this lease and that’s through a vehicle, a limited partnership that’s separate kind of from your other obligations or where you house your assets, then you kind of keep those potential liabilities out there. And then from an asset protection perspective, if this partnership is “liable for those lease obligations” but the doctors as limited partners are not, [00:21:00] then they can’t get to the doctor’s assets. So you end up creating a strategy to protect your assets as a doctor.
So the overall main purpose of a limited partnership is to enable investment in business operations with this clear separation between the active managing general partner and these kind of passive protected other doctors. So we talked before commercial that certain actions or circumstances like signing your name to it can either cause you as a limited partner to lose your status or possibly even you just signed in some way as an individual obligating yourself to this lease. Either way it’s not a good outcome. [00:22:00] They’re either treated as individually kind of obligation with the general partner or as a general partner if they believe their limited partnership status.
Brad: Yeah. And Michael, you mentioned this before we went to commercial. As limited partners, they generally enjoy limited liability, meaning that they’re only liable for the amount of their investment and the GP has unlimited personal liability. You noted also certain actions they may take that causes them to actually lose that protection. So examples, participating in the management as a limited partner exercising control, or inside of contract it has explicit language granting them controls. So if a limited partner explicitly represents themselves as a partner or managing responsibilities, performs, acts on behalf of the operational decisions, all these factors would be examined to determine the degree of control that these limited partners are asserting [00:23:00] or on the management side of these activities. And doing so, have they pushed themselves away from being a limited partner, meaning that they’re just kind of owners and have now they assert themselves into the general partnership piece.
And as such, if you are in a limited partnership or considering putting one of those together, you need to stay away from these types of decisions as a limited partner. Now, we understand Michael that they’re doing all this to protect themselves. But we’ve talked about this other times. There are different hats that as an investor and a doctor and an owner and a manager that you wear. Why don’t you kind of take a step back and talk about the differences here? Because these same people could be wearing lots of different hats.
Michael: Yeah. And it’s really important because that’s how you actually maintain the protections you’re seeking in the first place. Is to recognize outside of this limited partnership entity that you are wearing a hat as a practitioner, [00:24:00] as a doctor in this case. And so you have that, you might be an employee. So you have that hat as what’s your role as an employed physician. You might be an owner of the practice and that you have a hat there. Then you transition and you’ve got this side thing, this limited partnership, and there’s different hats that you may have even in that realm. So you might be an owner of the general partner LLC. Again, think of the general partner as this is the decision making vehicle for this limited partnership. And you could be an owner of that, which means that you have some sort of influence over the entity that makes decisions. Well, you might even be a manager or an officer of that entity, which then means you’re on the front lines making decisions on behalf [00:25:00] of that entity. And all those hats which may show up in the way that you sign a document are different than your hat as a limited partner which means that you’re basically just an owner being shielded from the liabilities of these partnerships as long as you don’t do things you’re not supposed to do.
Brad: Right. And that’s a good point. What Michael’s trying to say is some people get freaked out and they say, “Well then, I guess I can’t manage my own business, or I can’t manage this GP.” You’re like, no, no, no. But Michael’s point is, yeah, you can, but you’re wearing the different hats. And now that you kind of walk the different hats and we can clearly articulate that there is a difference, why don’t you go – we’ll take a little step back here again. And so in this particular case, we were talking about they executed as a limited partnership they entered in this lease. What could they have done with the signature blocks there?
Michael: [00:26:00] Yeah, and I alluded to this a moment ago too. But the biggest downside to being in a limited partnership is how easy it is to blow the limited partnership status. Because how you sign stuff is confusing because the general partner, as we said, is this kind of decision making center on behalf of the partnership. So that means that when a lease is being signed, the GP is signing that on behalf of the limited partnership. Well, what gets confusing is someone is signing that on behalf of the GP on behalf of the limited partnership. So it’s like the signature block is super long. Like you are Brad, as the president of the general partner is signing this on behalf of this limited partnership. And so, [00:27:00] you could see how it would be really easy to get that wrong.
Now, that doesn’t really make an excuse for signing your name. Just individually to the least. But it goes back to the overall point. No matter what kind of entity you are, is you understand you have different hats and understand the biggest place of risk and importance that that shows up. Recognizing your different hats is in how you sign obligations or documents. And so, again, whether it’s your own practice you signing as an officer or as a manager for an LLC, all of that makes a big difference on what risk you’re carrying.
Brad: Yeah. And so, to Michael’s point, audience members, again, it’s when you have all these different structures in place, knowing which hat you’re wearing when you show up to sign an agreement and making sure the agreement reflects the proper hat is critical. [00:28:00] And obviously in this case, these physicians learn the hard way that simple signature can – I’m using this quote “pierce the corporate veil” that they had surrounded themselves in. And it’s just kind of a stark reminder that in the world of business or health care – however you want to look at it, the devil is often in the details itself.
Michael: Yeah. Piercing the veil is a legal doctrine that has a very specific kind of concept legally. But the way we use it kind of anecdotally in conversation is just this idea of this is how the people that are suing you can get past this protection that you perceive that you may have. So what ended up happening at the end, Brad?
Brad: Well, Michael, unfortunately, after a lengthy and costly legal battle, the physicians did end up settling with a landlord for a significant sum. They were not happy about that, and they each obviously had to contribute personally to the settlement because they were sued personally and it was kind of a bitter pill for them to swallow.
Michael: Yikes. That’s not a good outcome. [00:29:00] Tell me what lessons can our listeners take away from this cautionary tale?
Brad: Yeah. This sounds weird, but have a qualified attorney view contracts before signing. No matter how good the CEO in this case negotiated the deal points and how happy they were with the actual business terms. Second, understand – and we’ve said it already. Implications of assign documents in both your professional and personal capacities is because you don’t want to really assume anything here. Because you’re building this complex business structure and you want to do it correctly. And obviously with this information, this can help at least at the very minimum, minimize the legal risks that you have and avoid obviously a nightmare scenario like this that we just discussed. All right, Michael, about the time to wrap up. Final thoughts.
Michael: Before you say yes to signing a document, tape your mouth shut and go make sure you get advice that you’re signing it in the correct way.
Brad: Yes, or don’t. All right. Audience members we are back, [00:30:00] next Wednesday, we’ll be discussing unintended consequences with special guest Dr. Alan Durkin. 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.
