In this episode, hosts Brad and Michael share the story of a physician with ambitions to launch his own investment fund. What began as a promising opportunity quickly unraveled due to an overly complex business models legal structure, hidden conflicts of interest, and a lack of proper oversight. Learn how well-intentioned business moves can unravel due to complicated legal structures and how to prevent these risks.
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. We sometimes find ourselves in a situation that can be traced back to a seemingly inconsequential or even unrelated decision.
Brad: That’s very true, Michael. Now let me ask you something before we jump into today’s story. Do you ever take selfies?
Michael: Well, my wife and I will take them occasionally when we’re out and we’re too lazy to ask someone to take our picture. I will have to say, Brad, I love to pull out the selfie move to embarrass my teenage daughters.
Brad: Yes. That is a very important aspect of being a good parent, is making [00:01:00] sure you embarrass your kids – so good for you. I agree selfies can be fun when they work. On a scale of one to 10, Michael, do you look good in your selfies?
Michael: I definitely do not look as good in a selfie as I picture myself looking when I’m taking the picture, and so I can’t do too many selfies where it’ll chip away my self-confidence.
Brad: Alright, fair enough.
Michael: But I’m not going to actually put a number on it for you.
Brad: All right. See, I would’ve said a hundred, but that’s okay.
Michael: Do you never fail for confidence? Yes.
Brad: All right. Do you have a trick to make sure you feel like you got the right shot when you actually do the selfie?
Michael: I try. I mean, I work on the angles. I mean, my goal is to avoid the double chin look. I have not mastered it like my kids have. They can flip a phone and like all these different angles and come out with a perfectly normal looking picture. But where are you going with all this selfie talk?
Brad: All right. Fair. I read this story that blends cycling, selfies and a little bit of chaos. [00:02:00]
Michael: For some reason, our partner Jeff Segal, just popped into my mind when you said that he’s an avid cyclist. Does this story have to do with him?
Brad: Yes and no.
Michael: Okay. Brad, that’s a vague answer, a very lawyer answer.
Brad: Should have said it depends.
Michael: You may as well have. It seems pretty straightforward as to whether you have a story about our partner Jeff Segal or not.
Brad: Okay, give me a second and I will get back to your Jeff question. This article, describes the unintended consequences of taking a selfie.
Michael: Did the article use those exact words?
Brad: No, but it should have. Picture this. It’s stage 15 of the Tour de France. You got fans lining the mountain cheering and your favorite cyclists and exciting stuff, right.
Michael: Okay. I actually think I know where you’re going with this.
Brad: Now, while watching this event, fans love the capture of these moments with cameras and sometimes their phones.
Michael: Watching the Tour de France is, I’m not going to pronounce it like you, Brad. It’s stressful when you see the crowds [00:03:00] packed on those super narrow mountain streets, and then see the bikers fly by. Actually, when I was in Europe last summer for my first time, that’s what I thought about was those bikers. Like, how in the world they do that?
Brad: I know. I agree with you. However, sometimes the excitement does lead to mishaps. And in this case, a spectator decided to take a selfie right in the path of incoming riders. So imagine this, the fan extends the arm and the phone in hand all while a group of cyclists are speeding by.
Michael: I remember the story. I knew this where you were going. Tell the audience what happened.
Brad: Well, the extended arm actually clipped the handlebars of an American rider sending him tumbling and crashing into a massive pile up of basically 20 other riders in this pile up.
Michael: Yes, I saw the video. Total mayhem.
Brad: If you haven’t seen the video, audience members, it is quite a spectacle. The pileup was the worst since an incident in 2021 when another fan holding a sign knocked down a rider resulting in multiple injuries.
Michael: [00:04:00] So, one thing I don’t know, do you know what happened to the selfie spectator?
Brad: Yes. Actually, she turned herself in and faced the fine of basically $1,300 after going to court. It makes you wonder how many times during a tour does something like this actually happen? Or maybe more importantly, maybe they shouldn’t be focused on the phone so much.
Michael: Yeah. Actually, that fine seems pretty small based on the impact that happened, but it does, I agree with you, Brad, it seems like the selfie phenomenon has some dangerous repercussions.
Brad: I do agree that the fine does seem low, but she does live in France, so she’s probably going to be shamed for the rest of her lifetime since cycling’s a big sport there. But here we have a moment where hundreds of athletes are really competing at their highest level and riding up the mountainside, as you said, and it takes just one inattentive fan to create this absolute havoc in seconds. And the Tour de France, these athletes are obviously trying to showcase how great [00:05:00] they are, but obviously it’s an important reminder to have a little bit of situational awareness.
Michael: So, I’m going to go back, Brad. You never talked about Jeff and you gave me that vague answer. What does this story have to do with him?
Brad: So, as you know, our partner, Jeff Segal, is the keeper of amazing stories. He actually has ridden on the Tour de France course, and in doing so, he was riding it the day before the actual riders are riding it; up and down those mountain paths that you and I are wondering how they do it. And then I don’t think he took actually selfies while riding though.
Michael: Yeah. The lead to that story, right there should be the fact that we actually got you to pronounce it like a Texan, you said Tour de France like I do, instead of going with your French. All right, let’s move on. I think it’s time to hear about our story today. Do you have something good for us?
Brad: I have an amazing story. You’re going to laugh, you’re going to cry. You’re going to hug me at the end. I’m excited about this story, the highlights of this unforeseen complications that can arise in the world of health care investments. So [00:06:00] the backdrop is we have a physician who’s really savvy when it comes to growing a medical practice and on his own personal investments, and we’ll just randomly call him Dr. Lance Armstrong. He has taken a few online business courses, read extensively on investments. Because he’s doing so well, a lot of confidence in his business models.
Michael: Okay. Two questions. Does Dr. Armstrong take steroids to help him with his investments? Second question. What was his overarching goal with this?
Brad: First, there’s no comment at this time whether or not Dr. Armstrong is juicing to assist him with his investment opportunities, so we’ll just leave that for right now. Second, to your second question. Dr. Armstrong took – so back to the overarching goal was, he had these commercial payers and he was really feeling the pressure of the change in reimbursements. And because of that, he was trying to find a way to develop passive income that was not driven by him [00:07:00] personally having to perform professional services.
Michael: Yeah. This is an age old pressure point in the physician world that kind of pushes them to look for ancillary revenue opportunities. And really our whole careers, we’ve heard this talk track and it doesn’t really change. Like there’s reimbursements seem to only be going one direction and that’s downward. And so from that, we have gotten the opportunity to be involved in lots of different investments. A lot of them are kind of traditional, expected health care related, and sometimes they’re cigar bars and bowling alleys and you name it. And I guess I should plug in, I actually know Dr. Armstrong as well, and I know he is the classic doctor-preneur as we’ve been saying.
Brad: So, one of Dr. Armstrong’s ideas was he wanted to develop an investment fund tailored for his physician [00:08:00] buddies, or doctors just in general, and something allow them to benefit from different type of ventures. And one was like a real estate venture or anything else that really would leverage his expertise.
Michael: Well, we talked about doctors, why they would look for passive investment opportunities. This is a whole new level to be the creator of a fund to be a home for the investment opportunities for the other doctors.
Brad: Agree. And because Dr. Armstrong had the extremely busy surgical schedule because he had a busy medical practice as it was, he really was struggling to find the ability to find the time to actually put this investment plan together and create the model that he had in his mind. And through some other friends and doctors, he was actually introduced to this business/real estate broker. And we’ll call him just randomly Mr. De La Tour.
Michael: Yeah. You must have spent hours coming up with that name. Is that even a name? Okay. We’ll call him Mr. Tour. How about that?
Brad: Fine. [00:09:00]
Michael: I’ve never heard of someone named De La, but okay.
Brad: [Speaks French]
Michael: I do want to comment. You used the word business/real estate broker, and there’s not a one size fits all when you see that term. I mean, there are brokers that are basically deal people, and a lot of times they’re trying to broker a real estate deal, which is what it sounds like, but a lot of times they do a lot of other things and they’re actually part of the deals and they’re basically real estate entrepreneurs, and so you don’t really know what you’re getting when you use that term.
Brad: Yeah, that’s fair.
Michael: What happened?
Brad: So, Mr. Tour, as you’ve decided to call him now, explained to Dr. Armstrong, he actually had a really good real estate investment opportunity to own and develop a medical complex. And part of this complex, they’re going to have a medical office building, an ambulatory surgery center, other type of medical retail and non-retail stores in this one complex.
Michael: Well, that’s a little [00:10:00] bigger than most of our opportunities that we talk about, but for a fun, I’m following.
Brad: Dr. Armstrong Should love this idea, but he had, again, limited time to meet with Mr. Tour and other potential brokers. So, he decided that Mr. Tour must have been good enough, so he hired Mr. Tour to help develop the plan of action. Mr. Tour set up all the meetings with the business attorney at a big law firm, and detailed all the sophisticated legal and financial structures that Mr. Tour had envisioned, including multiple SPVs, special promotes, promissory notes, several different classes of ownership. And Mr. Tour, he kept Dr. Armstrong in the loop with the model on how it would work. And Dr. Armstrong had limited conversations every once in a while with the deal lawyer who was helping put the deal together. But the deal lawyer reckoned a very complex model with tons of layers from a lot of different entities to make this deal work.
Michael: Not only did my eyes start [00:11:00] to glaze over with all those fancy words, I’m sure the audience is wondering what in the world you were talking about. This sounds complicated. So, let’s step back and kind of explain some of this talk a little bit, what in the world is an SPV?
Brad: Yeah. And so an SPV is not a French term. It is actually a real term that on the street is known as Special Purpose Vehicle. Okay. It’s basically an entity that is created for a particular legal or financial purpose. It’s often used to isolate the financial risk. So Mr. Tour explained to Dr. Armstrong that Mr. Tour believed that this would provide a favorable structure for all their investment opportunities. Remember, this real estate deal is just a piece of the ideas they had.
Michael: Yeah. And you also used the word special promote.
Brad: Yeah. Cool word, right?
Michael: Yeah. Well, that’s a word that’s a great signal that it’s a real estate-related deal. [00:12:00] That’s where you most often see that concept. And basically, the special promote is some form of a preferred return for the people that are putting the deal together. Yeah. And so, you’ll see that, but it’s something to understand in the deal is that the people that are putting the whole thing together may get some sort of preferred return before there’s a waterfall to the rest of the investors.
Brad: Yeah. Correct. So the lawyer, again, the deal doc lawyer created a confidential private placement memorandum or PPM to outline the investment terms for the potential investors. Everything was on track. Dr. Armstrong was to work with the connections of his physician buddies to help secure these physician investors. And the business broker would be handling all the critical aspects of the deal, including the real estate component.
Michael: Yeah. So you used another term PPM, Private Placement Memorandum, and that may be more familiar to some, especially those [00:13:00] who’ve done an investment. This is a required document. So what a lot of people may or may not realize is that there are securities, laws, state and federal that govern investments like this. A PPM is a legal document that kind of discloses the deal and something that has to be put together in a deal like this. So Brad, the broker was key to their plans?
Brad: Yes, key. Remember, because the doc was so busy, Dr. Armstrong, he needed this broker to help with stuff, and the broker and the real estate attorney, or the deal doc attorney, were driving the structure and the deal itself. And Dr. Armstrong recruited many of his colleagues and friends to invest his new venture. And they were off to the races to develop this large track of land that we described earlier.
Michael: I feel like this is one of those ominous music cue moments, but I don’t know. I feel like there’s a but here, Brad, what’s going on?
Brad: Most likely you’re correct, but make sure we cut that. We don’t want to have that in that the podcast [00:14:00] that Michael’s correct. The issue arose out of the complexity of the structure. There was a group that owned the land that they were going to be woven into this overall development. The partnership that actually owned the land decided that they wanted more money for the land once they actually saw the plan that was being developed for the space. So to make it messier, it turned out that the business broker, Mr. Tour, was also the partner in the company that currently owned that real estate that he had the deal that he had brought to our nice Dr. Armstrong. And this was not disclosed to the investors, and nor was it disclose to Dr. Armstrong.
Michael: Yeah. Things get real messy fast when you have these kind of conflicts, even if it’s ultimately allowed, just the trust factor at a minimum is threatened. So, you said something that’s curious. So the new venture did not own the real estate.
Brad: It was a [00:15:00] huge setback because the entire investment model hinged on the fact that the real estate had to be part of it and secured.
Michael: That had to be a massive blow to the project. Okay, talk about the implications and when did we get involved in all this?
Brad: Well, one of the physician investors told Dr. Armstrong to call us. We were asked to conduct a business assessment of the model and what else was missing. As the investors had lost, obviously faith, and Mr. Tour and the lawyer who had put the deal together and Dr. Armstrong was trying to figure out what happened here.
Michael: Okay. Did you pull in a real estate specialist to help?
Brad: Yes. We did partner with the real estate attorney assist with all the steps to really make sure how can we secure the dirt. And additionally, the deal structures, like we said, were almost too complicated for what was really needed. We helped with the business structure and the real estate attorney help discuss all the real estate ownership issues. And based on what we discovered, the deal was, again, super complicated with these multiple SPVs, with different ownership [00:16:00] structures, as you said, the preferred returns, and although the PPM did discuss most of which I’m saying as the investment, it really wasn’t clear to many of the investors what asset would be owned by what entity.
Michael: I’ve noticed that you and I keep saying the word complicated throughout the story. Is this complexity the unintended consequence of the story?
Brad: Yes, Michael. It is. Good job. Alright, we got to cut that again. I can’t be giving compliments to Michael. Yeah, so Dr. Armstrong was a sophisticated business person, and he was not really intimidated by this, the complexity of it. It actually excited him. The problem was that he did not really have time to really get in the weeds of the deal and had a bunch of physician partners who were not as sophisticated as him to really truly understand what they were getting into.
Michael: It definitely sounds like making this simpler could have saved a lot of heartache.
Brad: Yes. And we also learned that based on the complex model and different classes of [00:17:00] ownership, the voting control or decision making was really jacked up. That’s a legal term by the way, Michael.
Michael: Jacked up? Love it.
Brad: Yeah, yeah. Making it extremely difficult to prove any modification to the model that was put together.
Michael: Yeah. I mean, we’ve talked before about kind of our approach in working through a business arrangement, and we talk about the four C’s, and it is getting down to the most simple level of you have to understand, particularly what we’re talking about now, one of the C’s is control. How are decisions going to be made? You have to map that out, and it has to be clear. And guess what, Brad Complexity actually makes it less clear.
Brad: So complexity is a bad C of the four Cs.
Michael: Yeah. Complexity is not one of the four Cs.
Brad: Got it. I got it. Thank you. And so Michael, we also learned that Mr. Tour had another similar deal going on elsewhere in the state that seemed to have like the same kind of complex structure.
Michael: So well, [00:18:00] that might mean that he’s not good or he is overly complex. And it may not mean that he is a bad guy. I mean, I don’t know anything about Mr. Tour himself, but definitely making things too complicated can backfire.
Brad: Yeah. So after speaking with Dr. Armstrong, we recommended the venture have to be restructured entirely. The problem was there was a risk of fraud claims from those investors because they could argue that the failure to contribute to real estate was deceptive or false. Additionally, there was no clear mechanism to really force these investors to accept any changes to the partnership agreement based on the voting issues, the control issues we just talked about a second ago. And each governing document needed to be modified in writing, again, getting approval from all the partners. And by the time we kind of dove into it, basically it looked like they needed unanimous approval from all these investors, which as you know, is just a nightmare. And it was pretty much like – it was just a disaster from that point on.
Michael: Definitely sounds like a legal minefield that you were trying [00:19:00] to navigate. Let’s go to commercial and learn more on the other side of what ended up happening with this deal.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto. I’m still here with my co-host, Michael Byrd. Now Michael, this season, our theme is Unintended Consequences.
Michael: Yes. And we have found one centered around this whole idea of complexity. To give a very simple recap, [00:20:00] we have our hero, Dr. Lance Armstrong, who is a doctor-preneur and wanted to do a land deal, a real estate development that had a lot to it. And he had a fund that he created that would actually was the driver of getting other doctors invested, et cetera. He brought in Mr. Tour to help him put the whole deal together. And what we learned as we were going along is that this thing was created in a super complicated manner, and we had some mishaps because they did not secure the land before they kind of put the deal together, or they thought they had, but then the landowners kind of started trying to change things. And so where you left off, you were talking about all the stuff when we became involved that you were trying to do to try to fix it, but also navigate the whole thing from blowing up. Before we start providing the legal impact on the [00:21:00] story, you mentioned some additional issues which were complicating the situation, so let’s talk a little bit more about that.
Brad: Yeah. And so, again, we had doctors investing, so there were some health care regulations that just weren’t really considered or addressed which could really affect the timing of this deal and obviously the overall structure and reorganization. And unfortunately, the business attorney had not been fully mapping out these moving parts as Mr. Tour really kind of failed to disclose some of these key elements to the deal that maybe the business attorney, if he had known, could have changed it, thus leaving the venture in this precarious situation where the investors, they were in this complicated model that maybe wasn’t functioning as intended.
Michael: So talk a little bit about the legal risks that the founders have, including our client Dr. Armstrong.
Brad: Yeah, so the failure to develop the deal correctly exposes the founders to significant legal risks. They didn’t get the dirt, and so they could have been liable for misrepresentations or failure to deliver the promise and investment structure. And any of these investors decide to pursue legal action, it could result in financial consequences. And for Dr. Armstrong, more importantly, a tarnish in his reputation with all his friends and doctors that he brought into this deal.
Michael: Yeah. I mean it, you would have to hope that the PPM, that which is needed, and we talked about it earlier, had some risk disclosure. But even as you know, Brad, I mean, even if it’s a really nice document that discloses risk, like maybe the land wouldn’t be secured, you’re still dealing with a lot of expectations and you don’t know what things were said that were promised that could create this additional risk to the founders. But you also mentioned something above too. You were talking about the business attorney. So, let’s talk about the business attorney in this deal and the implications.
Brad: [00:23:00] Yeah. And hopefully our audience members understand. To be clear, this business attorney is a really well-respected business attorney, so it really wasn’t like he had done something bad from that problem. The problem for him was two issues. One, he had really never done a health care deal before and didn’t really know what questions he should have been asking other than what he was dealing with on the real estate side, which he was in creating this investment model. Two, he relied heavily, unfortunately, on the input of Mr. Tour to really set this model. Now, Dr. Armstrong liked what he was hearing, but he didn’t really understand either the actual impact of what the business attorney was putting together.
Michael: Yeah. So he didn’t kind of take control of the conversation; he was doing as he was told, which resulted in a convoluted business structure and he could have potentially done a better job of trying to reign them in. But you also, you mentioned this whole health care problem, and that’s what’s so challenging [00:24:00] about kind of the business of health care is, you can have a business attorney that’s really good on the structure side and you can also have a health care attorney that knows the regulations, but doesn’t really know the business side. And for any of these deals, you have to have both disciplines covered from a subject matter perspective or you’ll be carrying some risk.
Brad: Fair, which is one of the reasons why we brought the real estate attorney in. But while Dr. Armstrong was confident in his knowledge about the grand vision he had, but encountering these unforeseen obstacles due to the complexity of this invested model and his reliance in Mr. Tour, it just wasn’t really fulfilling the role that he thought Mr. Tour would be doing. This led to obviously the risk that we talked about earlier, and obviously the investors were really dissatisfied with the structure of the venture.
Michael: Yeah, it’s hard to adequately paint the picture of what this looks like because you’re not talking about [00:25:00] a couple of weeks delay when something like this happens. You’re talking about months and you’re talking about really elevated emotions because people have their money sitting out there that it’s threatened, and so it really is that legal minefield where you’re just trying to keep things from boiling over. But I’m curious, what ended up happening with the venture?
Brad: Yeah. The complexity actually made it very difficult to get this deal moving the way, as you said, and you had doctors who were investing in a medical office building and moving their practice there, and now we’re delayed by years almost to the point because of this reinvestment. So that was – your point is, that’s a huge issue that the deal wasn’t done properly. Eventually, the initial investors unfortunately were diluted as they needed to put more money in it, and this caused the need to bring in a new commercial bank, which then mean that certain investors, if they wanted to, now had to be guarantors of this loan, [00:26:00] which the original deal was not a part of, so some of the investors said no to that. I mean, you talk about the back and forth to slow this thing down. Now we have a new commercial bank involved, we had physicians who were being diluted, and those who didn’t want to get as diluted, they had to put money in and or do a guarantee on this new venture. It just ended up making, again, making it very difficult. Now, we were able to simplify the deal and actually just say, “Hey, this is a pure real estate deal. Let’s not worry about the investment entity right now, because all we’re trying to do now is get this medical office building launched.” And the investment opportunity, although was Dr. Armstrong’s vision, it just ended up not being something that we need to concentrate. And I threw out a word, maybe you can talk about the guarantee bit.
Michael: Yeah, you actually raised two things that it reminded me of what you’ll see in real estate-related deals that can be a huge unexpected issue, especially for our doctors who are busy running the practices [00:27:00] and they’re looking for passive income, so they don’t want to be as involved. One is the guarantee that you just mentioned. And so all of a sudden this goes from, I’m going to write a check for whatever, make up a number, a hundred thousand dollars, and I want to get an ownership piece and hope that that turns into something to, if this deal falls apart, I may be on the hook for part of the loan because you have personally guaranteed that loan. So, that’s an added element to the risk profile that obviously could change things dynamically. Another thing you see that’s similarly related is sometimes in real estate deals, or actually pretty often, they’ll have a clause in there where they can actually issue an additional capital call to make you as the investor, put up more money to fund the deal, and so you really have to watch out for that.
Brad: Absolutely. So, back to the story. So bringing in this commercial bank actually caused the model to shift even [00:28:00] more because a new lender did not like the model. We had to basically scrap the corporate structure, simplify it a lot, move ownership around, have those new investors come in that wanted to put more money and our money or guarantees. And obviously, as you can imagine, a lot of heartburn for those who are the initial investors and for Dr. Armstrong.
Michael: Okay. Wow. Well, it looks like you painfully landed the plane, so to speak. You have any final thoughts?
Brad: Yeah, I mean, this is a perfect way to think about ways in which complex models sounds great, especially when you’re trying to be sophisticated and have all these moving pieces. And we’re not against it, by the way, audience members, so I hope that that’s not what you’re taking away, but sometimes simplicity is actually a better model for everyone else. And in this particular deal for Dr. Armstrong, it might’ve been just easier if you start off with a simple real estate deal first before he did a complex investment model that his vision was because it actually ended up [00:29:00] complicating the actual deal he was trying to get done. How about you, Michael? Some final thoughts?
Michael: Yeah, I mean, I agree. I’ll tag onto that and just say it needs to be purposeful complexity, and so start simple.
Brad: That’s a good word.
Michael: Yeah. Mark that, please. You got to start simple and really be intentional when you’re adding complexity as to why you’re doing it. And again, to your point, it can have a purpose, but you can also spiral out of control if you just keep adding on.
Brad: Absolutely. Well, audience members, we’re back next Wednesday when we discuss the unintended consequences of operating on crazy patients. 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 [00:30:00] 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.
