In this episode, hosts Brad and Michael explore potential pitfalls of partnering with questionable characters. Tune in as they share the story of a dentist who tried to sell a practice he did not own and the ramifications for those directly and indirectly involved. Learn about the complexities of the Dental Support Organization (DSO) model, how to navigate litigation threats, and warning signs when evaluating practice purchases.
Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
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. 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, Brad, we are riding the emotional rollercoaster of the various types of crises that will arise in the operating season of a business. Our theme this season is Running a Business This season we’ll be illustrating the types of problems that come up when you’re running a business and we’ll kind of walk through these different stories where these typical crises can occur.
Brad: Yeah. And running a business is just one of the several seasons of a business. Michael, what are the other seasons?
Michael: There’s four seasons of a business, and we’re dedicating an entire podcast season to each one of these seasons. We’ve [00:01:00] already gone through the building season, which is starting a business. We’re in the middle of running a business in the operating season, and we will next go to the growing season, where we’re trying to scale a business and then we’ll end with the buying and selling season. So this season, Brad, we’re camped out on running a business.
Brad: Now, Michael, like other shows this year, we will talk about a few these mini stories that didn’t quite have enough to make a full episode. Today’s mini story is the first medical board investigation I ever had to work on.
Michael: Did they have electricity back then, Brad, or were you using candles and ink bins?
Brad: No, Michael, we had it all including the worldwide web.
Michael: You know, Brad, that most people call that the internet. That makes you sound like a boomer.
Brad: Back to the story. Our client was the successful businessman and an anesthesiologist. He ran his own ASC, which was flourishing, and it was the process of expanding to a second location when we got first involved.
Michael: [00:02:00] So, Brad, you’re just trying to sneak a vocabulary word in. ASC stands for Ambulatory Surgery Center audience. And Brad, this sounds more like someone who’s in the scaling season of the business than just the operating season.
Brad: Just hold on. I had a number of calls with this doctor as we were working out the corporate documents and funding for the second location. And we’ll call this anesthesiologist Dr. Arthur Bach.
Michael: Wait, that name is familiar to me. Hold on. I’m looking up the name reference, Brad. You had to bring up another 1980’s movie character.
Brad: Nope, totally random name.
Michael: According to Siri, Arthur, is it Bach or Bach?
Brad: Eh, I go through either one.
Michael: Either way, he’s a drunken New York City millionaire who ends up falling for a common working class young woman from Queens. This is as I remember him from the 1981 movie. [00:03:00] Arthur?
Brad: Yeah. Well, maybe it’s not a random name. As Author was a millionaire, and according to the medical board complaint, he sent me, he was accused of having a drinking problem. Instead of responding to the board’s initial request for a meeting, Author ignored it as such Author’s medical license was suspended.
Michael: Oh, the old head in the sand strategy. What happened?
Brad: Yeah. I spoke with the medical board, and they had a lot of affidavits from doctors and nurses that said Arthur had a serious drinking problem.
Michael: Okay. Well, what did he say, Brad?
Brad: Well, first, Arthur had said that these people were just complaining ’cause they own in another clinic and they’re just competitors, so just ignored it, hence the suspension. And second, on the call he said to me more than once, in fact, multiple times, that he was a functional alcoholic that never let his drinking impact his work. But obviously the board disagreed. We negotiated a settlement with the board that he would attend a rehab clinic, and based on this evaluation, the parties would then determine next steps.
Michael: [00:04:00] Okay. Well, it sounds like you did a pretty good job in a pretty difficult situation.
Brad: Yeah, actually. He hated the rehab place and just after two days he left.
Michael: Oh, no.
Brad: Yeah, right. The attorney for the medical board called me up and I called Author and he told me he didn’t want to go back to the rehab clinic, and I said if he doesn’t, the board was going to permanently take his medical license and Arthur told me he didn’t need it to own an ASC and didn’t care, they could take it.
Michael: Oh my. Well, what happened after that?
Brad: Well, Arthur did remain an owner of the ASC, but he could no longer practice and oversee the medicine at that particular location. And then the second ASC that we got hired to work on, that fell apart when Author could no longer practice medicine, and then the other partners were worried about his drinking now too.
Michael: Well, that’s just an awful way to start an episode, Brad. That’s a horrible mini story. Do you have anything, anything that you can give us to hold onto here? [00:05:00]
Brad: Well, yeah, it was obviously you can’t make a full episode of that story, but the big lesson I learned is you can lead a horse to water, that doesn’t mean they will drink, meaning the Arthur could have handled this crisis better, but he chose to ignore it and basically allow it to consume him.
Michael: What I’m hearing is that even in a dark story about someone with a drinking problem, you managed to squeeze a dad joke in by using the lead a horse to water and make him drink reference. Alright. Well, it’s not the best analogy here, Brad, but we do need to bring things up a little bit, so let’s get to today’s story.
Brad: Well, today’s first character is a dentist named Dr. Arizona, who was working at a thriving dental practice.
Michael: Did the dentist live in Arizona? Brad?
Brad: Nope. Just a totally random name I just decide to use, Michael.
Michael: Brad, I do not believe in random names with you, especially we just went through Dr. Arthur and that whole naming, so let’s keep on moving for now.
Brad: Okay. Well, our second [00:06:00] character of the story is the dentist who was the owner and operator of several dental practices in multiple states, including the location where Dr. Arizona practice, and let’s just call him, I don’t know, Dr. Danny Ocean.
Michael: Okay, well I know now you’re going movie reference on me again because Danny Ocean is very familiar to me. This is the name of the main character in “Oceans 11” played by George Clooney.
Brad: Man, gold star for Michael, Kennedy. He’s racking them up. You are on fire today, Michael.
Michael: Well, for those who do not know the movie, Danny Ocean is a slick con artist, and he develops an elaborate scheme. By the way, scheme is never a good word to be used in a story, to strike it rich by robbing three Las Vegas casinos in one night.
Brad: Well, that is correct. Well, Dr. Ocean approached Dr. Arizona and asked him if he’s interested in buying a substantial portion of a dental practice location where Dr. Arizona [00:07:00] was working.
Michael: So, Brad, did Dr. Arizona have an employment agreement that discussed his rights to buy into the practice?
Brad: No, Dr. Arizona and Dr. Ocean had actually never discussed it. In fact, Dr. Arizona had never even considered buying it, all he really did was treat the patients there and he had no ownership or any illusion that he had ownership in the practice at all.
Michael: Yeah. And let’s talk, audience, for some context. In the dental world, there is this concept you hear called corporate dentistry and the idea is there are DSOs that are out there that are chain dental office and there is a market for what, you’ll hear the word chair docs, but it’s essentially dentists who want to be employed and they’re basically coming in and not to treat patients and they’re signing on to be an employed dentist.
Brad: Yeah. And Michael, I think we just had our first vocabulary the day. [00:08:00] You said DSOs, for our audience members not familiar, what is a DSO?
Michael: DSO stands for Dental Support Organization, and these are oftentimes large organizations that manage the business and nonclinical aspects of dental practices. The bigger picture is that in the dental world in many states, there’s this concept called the Corporate Practice of Dentistry that prohibits non-dentist from owning and operating a dental practice. And so, the DSO is a longstanding model that’s in place to allow non-dentist and often large private equity backed organizations to essentially manage these dental practices. And there are certainly advantages and there’s also some drawbacks and things to consider before going with a DSO model.
Brad: Yeah. And in this case, Dr. Ocean actually did [00:09:00] have a DSO involved in the managing of the business and non-clinical aspects of all the dental practices. In fact, Dr. Ocean did no wrong and really practiced as a dentist. He was the CEO of the DSO.
Michael: All right. Let me summarize what I’ve heard so far, Brad, because you know I’ve got to make sure that I can follow the bouncing ball here. You know, I need context. So, I’m going to say this back. The CEO of the DSO is Dr. Ocean. Dr. Ocean was a founder, he’s a dentist, but he’s no longer practicing dentistry and he is focusing on the DSO side, and he approached Dr. Arizona, who is a chair doc at one of the dental practice locations. And Dr. Ocean offers to sell him a portion of that dental practice at the location where he was working. I have the facts correct so far.
Brad: Yes, Michael, you’re doing great. Yes. So, Dr. Arizona is actually excited by the idea that Dr. Ocean [00:10:00] wants to sell him some of the practice and if Dr. Arizona’s good with it, Dr. Ocean says to him, “Hey, Dr. Arizona, just have your attorneys just draft a purchase agreement and maybe I’ll have my team review it.” So that’s where we are.
Michael: Well, I’m following what you’re saying, Brad, but that’s a little weird. It is unusual for the CEO of a DSO to say to an employed dentist, why don’t you just have your attorney draft the purchase agreements? It’s almost always the opposite direction where the DSO has systems in place and they have counsel and they have their purchase agreements, especially in a large DSO from this story.
Brad: Yeah. Well, that’s a pretty good catch, Michael. Yes, it is a little unusual, but not totally uncommon. Dr. Arizona retains an attorney that drafts some documents and sends them to Dr. Ocean to review. When Dr. Arizona sent the documents [00:11:00] to Dr. Ocean, he thought it might be a couple weeks, or at least a week before he’d get anything back.
Michael: Why?
Brad: Well, Dr. Ocean was actually in Vegas celebrating a big deal he had done with the DSO. Even with the Vegas trip going on, apparently Dr. Ocean spent some time and executed the agreements the same day it was sent without any changes, and Dr. Ocean only wanted to confirm that Dr. Arizona knew where to wire the purchase price.
Michael: Okay. Brad, I thought you said this was a large DSO organization with locations in several states. Generally, a DSO that size will have in-house counsel, or at least outside counsel that would review the documents.
Brad: Michael, the DSO actually had both. Dr. Arizona just assumed his attorney did such a good job on developing the documents, which is why Dr. Ocean executed so quickly.
Michael: I’m starting to get nervous here, Brad. Who did we represent in this deal?
Brad: Yeah, that’s a harder answer to – well, let me just give you a few more facts before I completely answer that question. First, [00:12:00] Dr. Arizona’s attorney was a friend of his who mostly litigated, but he had formed a few LLCs when he first started practicing. Second, Dr. Arizona had actually never seen the actual books and records of the dental practice. He has only provided some emails from Dr. Ocean showing the revenue of that particular location.
Michael: Brad, this is starting to feel more like a red flag season. If I had my ding button, it would be going crazy right now rather than a season with a theme of running a business. So, I assume there was a crisis that’s about to happen. So again, Brad, I’ve got to know, who did we represent?
Brad: Well, Michael, we didn’t represent anyone in that deal. However, we did represent the largest investor group of the DSO, and the DSO was in crisis. It was bleeding money faster than it was taking in. And there was a bank who had lent a ton of money to the DSO, and it had called the note and was going to seize all the assets of the practice.
Michael: Well, yes, Brad, that [00:13:00] can be a crisis, and that is a shift in the story. And by the way, I’m so relieved we weren’t representing either of those parties. What did we do?
Brad: Well, the investor group of the DSO believed that they could make it work and negotiated with the bank to buy the assets of inside what they call the planned forfeiture with the bank into a new DSO, largely owned by our clients. As part of this deal, we worked out that Dr. Ocean was to be removed as the CEO and we’d have a slight ownership in this diluted new DSO. In addition, Dr. Ocean was removed as the owner of all the dental practices and a new dentist was brought in to be an owner of the dental practices.
Michael: Yeah. And generally speaking, going back to context wise, when you are a founder and a dentist and you start a DSO, oftentimes you’re as the dentist, the owner of the dental practices as well. But I’m guessing that you meant all the dental practices except [00:14:00] for the one that Dr. Arizona purchased.
Brad: Well, Michael, what if I told you I had beachfront property in Arizona that I’d like to sell to you?
Michael: Well, that’s a strange way of answering my question, Brad. I would first decline and second, feel insulted that you thought I didn’t know Arizona does not have beachfront property. Why are you asking me this question?
Brad: Well, when Dr. Ocean sold the dental practice to Dr. Arizona, Dr. Ocean actually no longer owned it or any of the assets as the forfeiture plan with the bank had already been completed by our firm. Dr. Arizona only bought the idea of owning a dental practice, or in this case, oceanfront property in Arizona.
Michael: Well, that is definitely a crisis for Dr. Arizona. When did you learn about this transaction?
Brad: It’s better to hear how Dr. Arizona learned he was not the owner of the dental practice.
Michael: Okay, I’ll buy it, Brad. How did he hear it?
Brad: When the new dentist took over all the dental practices several weeks after the deal was completed, she called [00:15:00] a meeting with all the chair docs and discussed the updates to the practice. Dr. Arizona called his attorney as he was confused, as he thought he recently bought the practice. Dr. Arizona’s attorney, who as a reminder was a litigator, found my name on some of the corporate documents, and called me and threatened our clients with litigation.
Michael: Well, that is a crisis. I think we’ve reached a good point, Brad. We can go into commercial and on the other side, let’s talk about how we responded to these threats.
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. 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 [00:16:00] 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. Now Michael, this season, our theme is operating a business, and we’re talking about real client problems that pop up during the operating seasons of a business. Michael let’s talk about how to respond to a crisis when an owner threatens litigation.
Michael: Well, I think at first, I need to address the elephant in the room as to even if Dr. Arizona is an owner, but in general, when dealing with threats of litigation, you have many options on how to respond. The first and foremost is that the stakes have just gotten raised when there’s a threat to litigation, and it starts a process where now you have a threat of war essentially, and everything that you have is potentially exhibit A to whatever is going on. [00:17:00] So, I think the first and foremost thing is just the actual defensiveness and alarm bells need to go to a new level when you get to that point. But the second thing is, emotions can get triggered at this point, and you’re running a business.
And in this case for you, our clients were taking care of a sticky situation and focused on a failing business, and this truly came out of left field. And so, while it would be natural to emotionally respond to something that you were not even on your radar, that’s certainly not going to help the situation because you can bet – I’m betting that Dr. Arizona and even his attorney were probably emotionally triggered to realize that they bought beachfront property in Arizona at this point. And so, it becomes [00:18:00] important to be able to manage your emotions, to be able to come up with a non-emotional plan. Like, you may decide you’re going to fight, but it needs to be a rational decision, or it can lead to unwarranted escalation. but we need a lot of information to be able to properly respond when something like these pops up. This had to be out of left field for you whenever you first heard about it. So, what did you do next?
Brad: Yeah, it’s a great point. The first step of the process is once you have your motions in checked is that collection of information. And that’s what we did. We requested a copy of the purchase agreement that Dr. Ocean sign, to be clear, again, this was not our client, and it was executed with Dr. Arizona, and we wanted to better understand what was “sold” and when did it all occur?
Michael: Yeah. And this is interesting, audience, this is coming from the perspective of a [00:19:00] recovering litigator. And it’s been a minute, as in years since I’ve done this, decades since I’ve done this. But when someone comes at you with an allegation and you’re needing this information, you’re not necessarily going to get it. I mean, especially if they’re zeroing in on filing the lawsuit, and then you got to go through a process through your litigation attorney to eventually get the information. But trying to, at the front end, figure out where they’re coming from and why they’re doing it and asking them to share this makes total sense. I mean, you can’t understand what they’re alleging if you don’t see this purchase agreement that he alleged happened. And just, what’s the essentially legal documentation and basis for your position that this all happened in the first place?
Brad: All good points. And to respond to this crisis, we needed all that information and we needed to review our filings to confirm when the actual forfeiture [00:20:00] plan went into effect and when it was documented with the proper government agencies.
Michael: Brad, you keep saying forfeiture plan as if everyone understands what it means. And I don’t really understand what it means, so you’re going to have to help me there. But for the audience to understand why this forfeiture plan is critical and the date of this plan is so critical; kind of talk to us about what you mean by this term forfeiture plan.
Brad: Yeah. So hopefully our audience members never have to really learn what a forfeiture plan is – but good point. For today’s story, first, I’ll just address the legal term forfeiture. Generally, forfeiture is a very broad term that can be used to describe any loss of property without compensation. That’s the important word. A forfeiture may be a privately arranged, for example, in a contractual relationship with a bank. If a party fails to pay on the note, the bank may deem it’s been forfeiture, and then receive that forfeited property. [00:21:00] Under this forfeiture plan, parties can agree that the property has been forfeited, but develop a plan to pay it back, and the bank can either transfer those assets to a new entity, which will then pay back the forfeit property.
Michael: Well, this is starting to sound very complicated, Brad, and actually a little boring, but it’s okay. I guess we need to better explain how to respond to this threat of litigation.
Brad: Yes. But in addition to the assets and ownership being removed as part of the forfeiture plan, the bank did file something called a UCC1 to protect the bank.
Michael: Oh man. Now you’re making me get technical. It’s almost like payback for making you define forfeiture plan. So, I do understand where you’re going and why. For those who don’t know, a UCC1 is a public filing. It’s a financing statement that a creditor will file with certain government agencies. And the whole purpose of this is to give notice to the outside world that that [00:22:00] creditor has an interest in the property of the debtor or the person that owes something. And so, this form is filed to give this public notice. And it’s much like a house mortgage. The mortgage must be released before the ownership can be properly transferred.
Brad: That’s correct. In this case, we checked, the bank had filed all the proper public notices, and as such, we received the information. We learned more about – the investors had gotten the sale done but didn’t know about their arrangement. Our clients didn’t know anything about this arrangement between Dr. Ocean and Dr. Arizona. And finally, all the closing documents and filing papers had been done properly.
Michael: So, I’m going to say this back to you to make sure I’m following this kind of bouncing ball because we made life messy with UCC1s and forfeitures and all this. But essentially what I’m hearing you say, Brad, is that our [00:23:00] clients went through this forfeiture process with the bank. They were defaulting on the DSO, they reorganized under this new DSO. And as part of that, all the notices to the outside world were filed. This was all done before Dr. Ocean tried to sell this practice to Dr. Arizona. Am I tracking so far?
Brad: Yep.
Michael: Okay. Well, so that makes me think this crisis is really between Dr. Ocean and Dr. Arizona. What did you do next?
Brad: Fair point so far. I spoke with our clients, and we discussed the options on how to respond to this potential litigation, much the same way you had actually discussed earlier. The big issue we discussed was the cost of defending a claim, if any, by Dr. Arizona, and obviously the risks associated with that.
Michael: Yeah. So, audience, this is kind of big picture like I started earlier, I started talking about, what [00:24:00] do you do when you get sued or someone threatens to sue? And we talked about the emotions, et cetera. Well, there’s also a business approach to litigation. Like, people perceive that this can be the path to justice, and it is, but justice is not free – in civil court in particular. And so, there is a definitive cost to being right if you want to defend yourself. And so, you have to pay for your cost of defense with your lawyers, and there are other types of hard costs that are in incurred and defending yourself. And so, that’s why you see so much, or you hear so much that civil lawsuits often are settled outside of litigation, or once the lawsuit’s filed, they’ll be settled before they go to final trial, just simply because it’s so expensive.
Brad: Great points. And after addressing these issues with our client, the fact [00:25:00] that our clients had closed the deal before the “sale” occurred with Dr. Ocean, they didn’t want to pay anything to Dr. Arizona. Our clients believe since Dr. Arizona’s claim was actually with Dr. Ocean as he was the one that actually executed all the agreements. And in fact, Dr. Ocean’s name was listed on the purchase agreements, not even the DSO or the actual dental entities. And additionally, if Dr. Arizona counsel had conducted any due diligence of doing this public record search, the attorney would’ve noted that even prior to the forfeiture plan, the bank had liens on the entities and its assets. As such, the bank would’ve been required to approve such sale. Our clients felt confident that if Dr. Arizona sued the new DSO, that they would counter sue Dr. Arizona as they know they were there.
Michael: Okay. So, what happened with Dr. Arizona and Dr. Ocean?
Brad: Dr. Arizona’s attorney quickly realized that [00:26:00] if he sued our clients, we would point out all the flaws in him handling this “sale” of the dental practice. Further, and shocking, but I guess not shocking news, we quickly learned that Dr. Ocean had done these sales to other dentists to get some additional capital after the forfeiture plan was closed which he used the party for several weeks in Vegas.
Michael: I’m guessing there was no money left.
Brad: No, the party was pretty raging apparently, so he spent a lot of it, and later Dr. Ocean declared bankruptcy as a number of other lawsuits, and a dental board complaint was filed against them by other dentists. Well, Michael, we’re getting close to the end of today. Final takeaways.
Michael: Well, I’m curious if Dr. Ocean was hooked up with Dr. Arthur to celebrate. He may not at that time. Yeah, Brad, these are for sure cautionary tales and the fact that I’m so [00:27:00] very thankful that we represented who we represented in this story, because it did not end well for the main characters. And you know, just goes to show you that the quick and dirty, too good to be true scenarios are usually that.
Brad: Sure. Michael, next Wednesday we’re back and we’re going to address something. And it’s not so much a crisis, but now that you have an MSO, now what? 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 [00:28:00] on the program does not imply an endorsement of them or any entity they represent. [00:30:00] Please consult with an attorney on your legal issues.
