In this episode Michael and Brad share the story of a surgeon whose sudden diagnosis forced him to stop practicing medicine, and the impact this had on his practice, partners and insurance. Tune in as we dive into lessons learned from this tragic story and the importance of syncing your legal, tax, and financial professionals when developing the business succession plan.
Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at firstname.lastname@example.org.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues, simplified through real client stories and real world experiences. Creating simplicity in three, two, one.
Brad: Welcome back to another episode of Legal 123s with ByrdAdatto I’m your host Brad Adatto with my cohost Michael Byrd.
Michael: Thanks Brad. As a business in healthcare law firm, we’re often immersed in the heavy details of a particular issue or project. It’s beneficial, if not mandatory, to every so often take a step back and evaluate the bigger picture. This season’s theme is Zoom Out. We’ve all been stuck in the life of a global pandemic, so today we are going to take a step back and look at how the issue we discussed will be impacted in our new normal. Brad, today’s story is a tragic story of a surgeon who had to stop surgery suddenly and the impact [00:01:00] it had on this practice as partners and their insurance was quite the gripping and sad story.
Brad: Yeah, totally. The shock for all of us who are involved with the story. When we were preparing for today’s episode, you and I started having a sidebar and we started talking about the stories that we thought of all these amazing people though that we have met, who have suffered some type of disability to these non-profit organizations that we support.
Michael: Yeah, that was great.
Brad: And so for our audience benefit, we support several different nonprofits. You’ve heard us talk about some of the other episodes maybe, but there’s some inspiring stories about these individuals who’ve just had to confront some really tragic disabilities.
Michael: Okay, Brad, I’ll bite. You want to tell one of these don’t you?
Brad: I do. And unfortunately I have a plethora of them, but this one, you and I are kind of talking about it and you remember the story a little bit, but a couple years back, actually about nine years ago now, I met a gentleman who’s now considered good friend, [00:02:00] Jacob Schick. I met him through an organization called Carry the Load
Michael: Yeah, as a reminder, we did an entire podcast with two Navy SEALS who started Carry the Load in May of this season.
Brad: Yeah, that’s right. Thank you, Michael. So right now, so Jacob Schick and everyone who knows Jacob calls him Jake. He’s a third generation combat Marine. While on deployment in 2004 in Iraq, his vehicle went over a triple stack mine that detonated and as Jake tells it, God has a sense of humor because he remembers every aspect of the explosion. Now you have to understand, unlike Birdman who was also blown up in Iraq, who was just caught on fire. And I say just because when you hear about Jake, Jake suffered massive damage to his body, fractures all over his left leg, right leg, left arm, right arm, multiple skin and bone losses, burns all across his body at different levels, [00:03:00] including his left hand and arm. Unfortunately, it was so severe they had to amputate below his left knee. Sorry, below his right knee his whole leg had to be amputated. And so while he’s in the hospital in Germany, the doctor’s like, hey Jake, we’re going to have to remove your left finger because it appears it’s not going to be survivable. They’re trying to go with, you know, get much blood into the system that’s working because again, his hand had suffered such damage. And so when the doctors told Jake that they were going to remove basically his ring finger, he told the doctors that he would choke them out if they tried to do it.
Michael: Whoa, well, I guess my follow up question, Brad is, and did the doctor decide not to get choked out? And I guess the follow-up to that follow up is, why in the world did Jake not want his finger removed?
Brad: Yeah. And it’s weird because a lot of people were like, you know, he had unfortunately lots of other parts of his body had been removed already. [00:04:00] To answer your first question, the doctor did not get choked out because he did not remove Jake’s left finger, his ring finger and he had to go on and get other operations while he’s was there. In fact to date, he’s gone on to over 50 different operations. But later on, someone asked that same question, Michael is why didn’t you let the doctor remove your ring finger? And he told them, one day I’m going to meet a woman who loves me for who I am and I want to honor her by putting her ring on that finger, on my ring finger. And I just ran into Jake a few months ago and actually met his fiancé. So congrats to you, Jake. We are seeing the future that you could honor this nice woman that you met in the future.
Michael: Yes. And on a side note, Jake has done a lot with his life besides recently getting engaged.
Brad: This is true. Jake’s been really active in the non-profit world. That’s how I met him, through Carry the Load. He’s now the CEO of One Tribe Foundation. Many of you might have known of 22 kill. He’s been on a bunch of different TV [00:05:00] shows, radio shows, podcasts, and you may have seen him in two movies with this guy named Bradley Cooper in American Sniper, and A Star is Born. Besides that, Jake’s a good guy, but he’s also a phenomenal motivational speaker. And he said this that you and I actually thought about when we were talking about the script is physical pain reminds you you’re alive, mental pain tests your will to stay that way.
Michael: That’s a cool story. You did good this time, Brad. Way to go.
Brad: Appreciate it.
Michael: When we were bantering kind of getting ready for today and talking about how this story reminds us of some of our non-profit stories, I also couldn’t help but think of LEAP Global Missions. I’ve been on the board for LEAP for many years and LEAP is a Christian medical mission organization that travels to hard to reach and war torn countries to operate on children born with primarily cranio [00:06:00] facial disabilities. And it’s just the stories of how families are completely transformed because in their particular culture, the whole family and the kid will be outcast because that’s how they treat people with disabilities. And when that is fixed by something in America, that’s a relatively straightforward operation many times, it completely changes everything for the future of that kid and their family.
Brad: Yeah, absolutely. You and I we’ve had these amazing privileges to serve along these great nonprofit organizations. We’ve met great people, great leaders, and it may sound cliché but, it’s not to us. We both get more out of these organizations than we’ll ever be able to give.
Michael: So true. And one of the things that we get out of it is perspective. We have perspective in our day to day grind as business lawyers. It’s one thing to write a buy sell agreement, it’s [00:07:00] another to have a long-time client and friend suffer a disability and to work through not just the legal challenges, but the emotional impact that goes with that.
Brad: Yeah. Michael, so let’s get into today’s story
Michael: Well, the story starts off with a random call from a longtime client that we’ll call Dr. Kindness.
Brad: Byrd let the audience know, why are you calling him Dr. Kindness? Although I do think I know the answer here.
Michael: Well, it’s pretty intuitive, Brad. So you get extra credit for being the smart guy today. Dr. Kindness was truly a super nice guy and a kind surgeon and everyone who’s ever worked with him or knows him personally thinks the world of him. So Dr. Kindness tells me he’s going to retire immediately and wants to understand how to sell his shares in the practice.
Brad: For the audience, just to let you know, when we hear something like that, they’re going someone’s to do immediate retirement for us, it’s normally some type of red [00:08:00] flag. This is generally because a doctor is about to go undergo or about to get investigated by somebody or they’re about to get kicked out of their practice. But unfortunately, Michael, on this side, this is not the case here.
Michael: No, no. Dr. Kindness had done nothing wrong. He had been diagnosed with Parkinson’s and that was going to prevent him from continuing to operate. The ripple effect caused a host of issues personally and professionally. For purposes of today’s episode, we’ll only concentrate on the professional impact, but make no mistake the personal side of it was really difficult.
Brad: Absolutely. So one of the first actions we took was we requested all the applicable documents, including his employment agreement and his corporate documents to understand what are the next steps we need to take to help him.
Michael: Okay. Well, Brad, I think we hit our first vocabulary word of the day. When most people hear the word [00:09:00] corporate documents I think they have a couple of thoughts race through their minds. Number one, I have no idea what a corporate document is or they may just have died a little bit because we’re using a little too much legal mumbo jumbo. So for those who didn’t kill and are still alive, corporate documents are a collection of controlling and governing contracts between the owners and the officers and directors of a business entity. So this could be your formation documents that are formed to make your entity official with the state, or it could be your bylaws, which are the rules on how the entity is going to be run by the president and the secretary and the other officers and the directors, or it could be something even more personal, like a company agreement or a shareholders agreement. That is the [00:10:00] deal between the partners or the owners and on how things are going to work between them. And we did have an episode last season called Tear Soaked Pizza, where we discussed the importance of having an understanding these documents.
Brad: Yeah, absolutely. Thanks for the clarification and for those of you who I did not kill, we did review those documents and what we pulled together for this particular case, whereas the bylaws, a shareholders’ agreement and the employment agreement to understand when he does elect attorney, how’s this going to affect, especially the fact that we want to look at the impact of the ownership when he terminates for disability.
Michael: So, what did you learn?
Brad: Well, unfortunately we ran into three major conflicts and as we all know, that’s never a good thing. The first conflict was the language in the prelim agreement for termination for disability did not match how an owner could be terminated in a shareholder agreement. So I’ll give you an example, in [00:11:00] the shareholder agreement required the board approved that Dr. Kindness is deemed disabled for him to terminate his ownership while the employment agreement required an independent physician determined that Dr. Kindness is disabled.
Michael: Yeah. This can become a really big deal. These different methodologies to determine whether there is a quote, disability can be a huge source of conflict because it’s not always presented like it is here with Dr. Kindness saying, I’m out, and I’ve got to do it a lot of times. It can be much trickier. It could be dementia where the doctor thinks they’re still fine, but they’re not. The methodology to determine disability is a really big deal.
Brad: So the second conflict, Michael, is that the practice and ultimately Dr. [00:12:00] Kindness had bought some really phenomenal buy-sell disability insurance, however, the shareholder agreement had a purchase price for disability that did not actually match this disability policy. The actual example is the disability policy provided for $200,000 buyout while the shareholder agreement only provided for a $5,000 buyout for Dr. Kindness meaning contractually Dr. Kindness buyout for the practice was only going to be $5,000.
Michael: Yeah. And let’s pause for a minute just for some context to talk about disability insurance because that’s a really important element when people are planning around this and so it’s important first to understand that there are actually different types of disability insurance. So it’s probably intuitive because most people are familiar with it at some level. Is this a personal [00:13:00] disability insurance. And that’s a policy that you may have personally, that if you’re disabled, there’s going to be some monthly payment that will be paid to you during this disability. And when we’re talking about this it’s long-term disability, another couple of types of disability insurance are more geared towards the business, the practice in this case. One is disability overhead insurance and the idea there is if you’re a medical practice, if a doctor’s disabled, you’re taking some production off the table, but the bills don’t change. And so you can purchase disability, overhead insurance, where the practice will receive a monthly amount to cover overhead because of that loss in production. And then there is disability buyout insurance, and that is also in play in a story like [00:14:00] ours with Dr. Kindness, where the doctor’s going to be bought out because they’re disabled from their ownership. And you can actually have insurance that will allow the insurance company to pay the money towards the buy-out. So you can see going back to your example, Brad that you just gave that you’ve been paying for years, or Dr. Kindness’ practice for a policy that would pay up to $200,000, yet his agreement with his partners was just to be paid $5,000.
Brad: Yeah and that leads us, Michael, perfectly into our third conflict, which is, they had phenomenal disability insurance in general, but going back to your explanation that the second type of disability coverage they had was for the owners overhead. So that was for the benefit of the actual practice and for the practice they were going to get paid [00:15:00] $50,000 a month for expenses over the next 24 months if Dr. Kindness left for disability. However, the shareholder agreement, which he had signed said that Dr. Kindness only had to cover three months of overhead.
Michael: Wow. Same problem. Different type of insurance. And again, contractually Dr. Kindness only needed to cover his expenses for three months, but they’ve been paying for years for a really nice insurance product that would have covered it for an additional 21.
Brad: Yeah. And finally, for the audience, and some of you might know this is the insurance typically only pays for what the obligations are required. And typically it’s by these agreements. So we have this conflict that basically is going to cost hundreds of thousands of dollars, both to the practice and to Dr. Kindness.
Michael: Wow. Those were some major league conflicts. They paid huge sums of money for years to have great disability insurance, but they may not be able to even use the funds. Well, let’s go to [00:16:00] commercial. And when we get back, let’s discuss these conflicts and how to catch them in the future. And of course, learn about what happened to Dr. Kindness.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto here with my cohost Michael Byrd. Now, Michael, this season is Zoom Out and as part of our Zoom Out theme, we talk about that bigger picture. And Michael, we talked a lot about that corporate [00:17:00] governance, but why do people have governing agreements? What’s the purpose?
Michael: Well I think of it kind of in terms of a business marriage. And you’re going to go into a marriage and have to work out how that marriage is going to work. And in the business world that’s understanding some pretty major areas of how things are going to function. And as we always say, primarily the primary benefit of this is to make sure expectations are aligned.
Michael: And so what we’ve kind of come to it in our lessons from talking about those clients and giving speeches, as we talk about the four C’s and the way we explain it are the things that make or break a relationship among co-owners, things that have to be dealt with. First one, is [00:18:00] the first C is cost. If it’s two people starting a business together, initial capital, but it’s basically what money are you putting in and what are you getting in return for that. You want to make sure you’re on the same page there. Second is compensation and that’s dealing with this thought of you now are an owner but you also may be doing things on a day-to-day basis working for this business and what is the compensation for that contribution. Sometimes it’s a salary sometimes it’s based on your production and even in some startups, the owners don’t take a salary. They just say we’re going to be working to generate profits and we’ll split them. Important thing to be on the same page about. Third is control. How are decisions going to be made? The governing documents will determine what [00:19:00] decisions are big enough that may require everyone to agree and what decisions don’t require that because we’re going to order some more staples. And I know we have talked about that in prior episodes. And then the final, which of course is our subject for today, the final C is contingencies. That’s dealing with essentially the prenup, like what happens, if there’s a breakup? And the breakup isn’t necessarily a breakup because we’re not getting along or I’m going to move to a different state and do something different. It could be a breakup forced by a disability because the person can no longer do their job or to contribute to in this case, a medical practice or it could even be death.
Brad: I’ve heard you talk about this before, so I’m going to quote you on this one, but when it comes to the C with the contingencies, you often say, well this is the what if section [00:20:00] of the discussion and the what if section of agreement and these are important things to discuss. I’ve even said, this is the prenup piece and especially in these professional entities, how are you going to treat each other? How’s the medical practice going to treat someone? Let’s take a look again, zooming out here a little bit, focusing on the business succession side. What are some of your thoughts are things to concentrate on?
Michael: Well, as a starting point you need to define, what are the things that would cause a buy-sell or purchase of the practice? What are the what ifs? We call them trigger events in the contracts. I mentioned them a little bit already. One would be a death or disability, one would be well broadly a breakup. It may be an amicable one, where someone’s going to go and do something different or relocate out of state. And some [00:21:00] may not be amicable. Those are always fun.
Brad: Sometimes you might hear them call like voluntarily or involuntarily. Some people will like throw in retirement, so there’s different terminologies and we’ve seen real robust sections, we’ve seen very narrow sections, but those are all what I love about how you saying it is that these are things I need to concentrate on and I’m asking you this, so if depending on the trigger, can that impact the purchase price?
Michael: It can. Yeah. So let me put a pin in your question for a second and say that the next thing you have to figure out is what’s the value of the practice and what’s the purchase price going to be, and there’s a whole conversation that goes there. I mean, it could be a process to get a valuation done that has its own pros and cons to it. In this process to get a valuation, we just had an episode with Anna Brewer where she talked [00:22:00] about valuing a practice. So that’s one way to set it up. Another way to set it up is a little less formal with a formula to come up with the value of the purchase price. And then even sometimes you have a set number that is just the here’s the amount we’re predetermining the amount. All of these have pros and cons to them that have to you can’t just be plug and played and there needs to be a strategic conversation around it. But then that brings back your question, Brad, which is, well, let’s just say you go get a valuation and let’s say that someone is going to get bought out for a million dollars, but they’re going to go across the street and compete with you. Well it feels like a double hit right to the practice. They’re losing revenue. They’re paying the person to buy [00:23:00] them out. And they’re going to go compete with them. And so a lot of times to your question, there will be penalties to the valuation. If there are certain circumstances like that. Or you can have special provisions that deal with insurance funds that will be funding the purchase price, like our story today.
Brad: Perfect. Now that we understand Michael, why we need them, you know, in your thoughts, who should help develop these agreements?
Michael: Well, this is a trick question kind of, because I’ve heard you say this a thousand times, it takes a village or in this case, a team. Your team of advisors to all be on the same page. So if you’re the practice, you have the business operations people, you’ve got your CPAs, you’ve got your attorneys, you have insurance products and you have your insurance broker and all have to be aligned as [00:24:00] they organize this plan.
Brad: Yeah. And this goes back to, you and I have said this before in other episodes, but we always talk about the four C’s as the tools that we use to help develop these governing documents. But that’s where the fifth C come in, which is the communications between all those professionals. In this case that could have minimized all these conflicts and hopefully if not completely avoided if they had brought those professionals together.
Michael: Well, I mean let’s talk about that. The conflict, the problem, let’s meet the problem head on that happened here. We had different documents saying different things. What could the practice have done differently?
Brad: For starters, you already did a great job of detailing, a lot of the pieces with the four C’s and fifth being communication. But the practice in this case, they use different lawyers at different times to draft different agreements. And by siloing these attorneys and documents, the practice unfortunately had opened its self [00:25:00] up to all these conflicts that we’ve noticed. And further, by not having the financial planner or even copies of the actual disability insurance discussed with the attorneys. Everyone was blind to these conflicts.
Michael: So here’s the question, Brad. What happened to Dr. Kindness in the practice?
Brad: Yeah. So as noted in the story, everyone was about to lose big time because the forms didn’t match the substance. In the sense of the documents did not match which the actual policies they had in place. So in this case, both the practice and Dr. Kindness, were in alignment because these documents really didn’t reflect their actual intent of the parties they intended for the parties to benefit from these policies, these insurance policies, because of these alignments. And there were in lots of communications between the insurance agent, the CPAs, the practice itself and us, we were able to eventually modify all these documents to actually [00:26:00] detail the actual intent. The parties were lucky in this case, as we didn’t have a death, as you said, one of those triggers, the what if moments or complete mental disability, which impaired Dr. Kindness from even making decisions. Had any of that occurred or if the parties had not been in alignment, everyone would have lost. And one thing I will say that turned out well, because of this particular incidents, the practice did have a moment in time where we were able to go in and update all documents with new disability policies and we had everyone involved. And so the practice actually has a much better system in place now because they are luckily able to identify a weakness in what they had. But Michael, what are some of your final thoughts?
Michael: Well, I’ll just say this life happens. And whether we’re talking about the people who have had their lives turned upside down in an instant, that we’ve met through these [00:27:00] non-profits that we talked about at the beginning or friends who get the diagnosis that they woke up that morning having no reason to think they were about to get. It does happen. And I say that, because there is a tendency, as it relates to this type of planning to put your head in the sand and think that happens to other people, and it doesn’t happen to you. And so I can’t emphasize enough, the impact when you’re already dealing with the personal impact of a disability of how not having stuff together on the professional side will just compound the problem.
Brad: Yeah, absolutely all great points, Michael. And join us next Wednesday for Swiping Left on Unspoken Expectations.
Outro: Thanks again for joining us today. And remember, if you liked this episode, please subscribe. Make sure to give [00:28:00] us a five- star rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com. 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.