Legal 123s with ByrdAdatto (Losing Containment)
They say “where there’s smoke, there’s fire.” In this episode, Michael and Brad are joined by partner Jay Reyero. They share how quickly an eruption can unfold when red flags are ignored. In part two they discuss how to identify risks in an opportunity and protect your business when you smell smoke.
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 email@example.com
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 co-host Michael Byrd.
Michael: Thanks Brad. Welcome to another episode of season three dumpster fires. Today we’re going to talk about a common scenario. There’s a business idea and entrepreneurs created it. And the one missing piece is a physician partner. Now, one thing to watch for, as we listen to this is just think about how easily preventable this would have been had they taken certain steps at the very beginning. But I look forward to today’s episode.
Brad: Yeah, and before we bring in today’s guest, Michael, as you know, I’m a [00:01:00] huge football fan. What you probably didn’t know is that there are two different college football programs that actually reached out to me and asked me to play for them.
Michael: Okay well, first that’s interesting, in 1950 do y’all wear helmets back then? And secondly, are you playing a two truths and a lie here because that two schools actually recruited you. I mean, for those in the audience have never met Brad. He is five foot five and does not look like a college football player.
Brad: So no, I’m not playing two truths and a lie. It is true that two schools actually recruited me, granted, they were small schools, but it was a pretty cool rush.
Michael: So why are we trying to attempt to relive your glory years?
Brad: All right. As we know this season, as you talked about, it is about dumpster fires. I thought I’d share one of my biggest dumpster fire moments, which happened during one of my high school football games.
Michael: Okay I hope this is a real Brené Brown [00:02:00] style vulnerability story and not the fake I’m humbled and want you to know how great great I am type of story.
Brad: Well, I am great, but I will be humble. Okay, so I will go through this. So my sophomore year in high school we were playing Friday night against one of our biggest district rivals. Early in the game, our team had punted and I was the outside gunner. My number one job, number one job was containment of that punt returner. So I’m running down the field to tackle that returner and I completely missed them and let him break containment. And lo behold, he runs down the sidelines, the length of the field scores the touchdown. Literally by the time I got to the sideline, my special teams coach walked right up to me and said, Hey, you’re off all the special teams, the rest of the game, my sophomore year in high school, only way I was playing was with special teams. Basically I was benched the rest of the game. We lost that game and we never recovered with the momentum of it by me just missing that tackle. [00:03:00] So it was pretty rough because the rest of the game, I got to sit there and watch this dumpster fire live and I couldn’t even play. So it was like watching, you know, having more salt in the wound. And then the rest of the fans and the football fans actually saw me get pulled off and realized I didn’t play the rest of the game, basically blaming me. Well, maybe some fans did for us losing to our district rivals. So it was the ultimate sports dumpster fire, for at least for me.
Michael: Sounds like you hung onto that story a little too long there, Brad. I’m reminded of uncle Rico from Napoleon Dynamite right now. So I may just refer to you as uncle Rico for the rest of the episode, but okay I agree. That does sound like a dumpster fire moment for you.
Brad: Fair enough. Well when we started this conversation actually going back to it was good news. I was eventually allowed to play again and by the way, I never ever, ever broke containment again. Plus it was good enough eventually to make it to the big show.
Michael: And [00:04:00] by big show, you mean playing intramural sports with your fraternity in college?
Brad: Hey, there was D3 football. They invited me.
Michael: So let’s introduce Jay, who has been a guest on our podcast before. But for those of you who have not met Jay, Jay is a partner in our Dallas office. Has worked with us for 12 plus years. He actually started working with us while in law school and thankfully we’ve been able to keep him ever since. He like me, went to UT undergrad and then SMU law school. He’s married to his wife Katie they’ve been together since 1996. They have three daughters. Jay is a extremely competitive person. For those who have not met him it wouldn’t come across at first, but if you’ve ever bowled with him or done other sorts of activities, [00:05:00] it starts to come out and he uses this in the outside world through running marathons. And he is an anchor for ByrdAdatto with just his breadth of knowledge and just, a really great lawyer. Jay we are thankful you are here today.
Jay: Absolutely. Thanks again, guys, for having me. This is fun.
Michael: Awesome. Well, continuing this season’s theme of dumpster fires for the Legal 123s with ByrdAdatto, the story today is interesting because there was smoke in the dumpster over a period of time, but it wasn’t until the very end, when a full blown fire erupted. Brad you and Jay, both invested a lot of time in this deal, but it was actually you initially who got involved, right?
Brad: Yeah, that’s right. This is one of those situations where we are brought into after the business venture was already up and operational. Our client was a successful, but very busy surgeon who had been [00:06:00] approached by another individual with ideas on how to start a new healthcare business venture that was going to be very profitable for them.
Michael: So what was the plan?
Brad: Well, this individual who approached our client we’ll call him The Pitch Man was in the industry, was already a provider of services and offered that, hey we could, we could get together and form this new company and help work on the front lines. And more importantly, he had a friend that he wanted to introduce our client to.
Jay: Yeah, don’t they always have a friend, Brad?
Brad: Yes, they always have a friend and we’ll call this friend The Guru. Now the guru owned a company with significant experience in billing and revenue management, which was important for this particular service that they were going to do. And the guru knew all the tricks on how to bill insurance companies and successfully collect revenue from them. She was a big part of this deal.
Michael: Jay, this is something that we frequently come across. So this doesn’t sound that unusual from [00:07:00] the other deals.
Jay: No, not at all. I mean, it’s not uncommon for non-physician entrepreneurs to approach physicians or even physician practices, offering them an opportunity. And we’ve seen the offer be something like adding a type of service line to their practice or similar to this case, participate in a new business venture. And the pitch is that the entrepreneur has all the resources needed to launch and just needs that physician partner for one reason or another. So as you can imagine, physicians are extremely busy with patient care so this is a big selling point because they need to entrust others to handle the day-to-day operations.
Michael: Okay Brad, so what did you find when you got involved?
Brad: Immediately I smelled smoke because we were actually familiar with this guru and Michael I’m using air quotes. Does that help?
Michael: Yes, I see.
Brad: Okay, good. Yeah, the guru had previously worked with another one of our clients to handle some billing and collection needs and this girl again, was supposed to have the experience and [00:08:00] expertise to help them. Our other client, long story short, the GRU failed to actually perform anything promised. In fact, our client ended up losing hundreds of thousands of dollars in anticipated revenue and it got demands for refunds from the insurance companies, because it was billed so incorrectly.
Michael: So I get it. You started out skeptical, but Jay, weren’t there documents in place since it was operational already.
Jay: Yeah, the only documents that were in place were partnership or operating agreements work, which were fairly standard and they weren’t testifies nothing else. So we focus a lot of our time and energy at the beginning, just asking questions and trying to put all the pieces together just to ensure there was adequate documentation in place to protect our client’s interests at the time.
Michael: So it was a difficult getting that?
Jay: Oh, man, it was so difficult. It was way more difficult than it should have ever been. Brad and I would ask just the simplest questions regarding the business. I mean about [00:09:00] operations or compliance standard ones that any good attorney would ask at the beginning if they’re building something from the ground up and each time our questions were directed to the guru we would be met with silence. She would change the subject. She had even started demanding us, start working on duplicating this exact venture in another state because she had people waiting to do deals and our delays were costing everyone money. So our client would offer his insight every now and then, and his perspective. But when we tried to go confirm that with the guru who’s responsible for everything, there was just nothing there. It was totally unsuccessful. So it became very clear pretty quickly that not everyone was on the same page.
Michael: Brad, how did you handle a situation like this, where you’re trying to get a picture of what’s going on and yet we’re unable to get clear answers?
Brad: Yeah, it was difficult. You know, we spoke to the client on numerous occasions about the questions and concerns we were raising and the difficulty of actually getting [00:10:00] answers from the group. We pointed out the areas where he had certain exposures in this particular deal and we were trying to, we were focused on making those, you know, fixing them and trying to protect his interests. And so we finally agreed that it would be in his best interest if we just kind of hit the pause button and we all came in and then had a whiteboard meeting together.
Michael: So the word of the day is white board meeting. Brad, tell the audience what a white board meeting means in our conference room.
Brad: We have these dedicated walls covered in dry erase white boards, which allow us to draw out a situation in real time and visualize and depict what’s really happening. Typically we use these whiteboard meetings at the beginning to make sure everyone is on the same page as how the business model is going to look, where, who owns what, where the funds, how’s it flowing from one to the other. And so we said, look, you guys have to come in. And we requested the pitch man, the guru and our client all attend this meeting. So we get [00:11:00] the answers to our questions in real time.
Jay: And to our surprise, everyone came to the meeting and we worked for hours talking through everything. I mean, Brad, I felt like it was a productive meeting and by the end of it, we had a pretty good plan.
Brad: Yeah absolutely. You know, it’s like everything else, unfortunately is the best plan laid plans. And so the great thing about the whiteboard meeting is that we had a chance to kind of go through everything as you just said, but we had developed a whole bunch of ideas from that white board meeting. In fact, we came up some critical documents that were missing. And for the next, I don’t know, 10, 12 months, Jay, you and I were working through this with the pitch man and the guru, really trying to get all these documents finalized. And, unfortunately we saw certain things start coming to light.
What was most concerning was that even though we had that whiteboard meeting, and even though we had all these documents being pushed out to them, the pitch man and the guru were making comments and emails that contradicted everything we had just discussed at that whiteboard meeting. And again, we voiced [00:12:00] our concerns with our client and said you got to come to the office and we got to go over everything.
Jay: Man did that ever stoke the flame of the dumpster? I mean, this was the first time that our client really started questioning the people that he had trusted and began to ask more and more questions, seek additional information directly from them on the business operations. I mean, unsurprisingly, both the pitch man and the guru became non-responsive to him. But I think the breaking point was when the guru demanded a copy of an executed billing agreement that didn’t exist and actually never existed. And she said that all billing collection activities would be on hold until she got it. She claimed that Brad, you and I had already negotiated and approved it so it just needed to be signed. But then Brad and I informed the client that we had never seen that doctor before. And that was just the beginning of the end.
Michael: Sounds like full-blown fire now.
Brad: Yeah. And our client took a closer look at the finances and found significant withdrawals from the bank account to pay the gurus billing company. [00:13:00] which was not part of any of the model that we had ever discussed. And at one point he had to stop, a significant withdrawal that was about to happen. The company clearly was experienced cash shortages because they weren’t really sending any new claims. So no new claims going out, no new revenue coming in.
Michael: Jay, wasn’t there something that he could do or some kind of action to take, to stop all of this?
Jay: Unfortunately, no, the documentation that was in place wasn’t enough to really give them any good course of action and all the documents we had prepared that would have done so never got executed. So we kind of tried to negotiate the billing agreement just to keep things alive, but the guru was not having any of it. I mean, emails upon emails were being sent by her to both Brad and I, and she was demanding we just pick up the phone and get it done. My favorite was when she told Brad and me just to get it together, she finally snapped and delivered a termination notice for her billing services. That were effective immediately. And this was like a few days before the Christmas [00:14:00] holiday.
Brad: Yeah, that was great Christmas. And so we immediately had to try to salvage things, but all the relevant records that we wanted were in the possession of the guru, who of course refused to turn them over. To make matters, even worse the system that housed all the billing records was licensed under the name of the guru so we couldn’t even gain access to the system and so the guru was basically holding all the cards and basically holding our client’s information hostage.
Jay: Another big issue where the employees. Our client really wanted to start reaching out to them and keep them on board, get them ready to start back up once he found a new company to jump in. What he found was that the company had no employees because the guru had directly employed all of them through her company. And our client had no idea about this. He believed the entire time that all the employees worked for the company he’d been paying them compensation, their conventionalizing all their associated fees. I mean, some of the reporting even made it appear as [00:15:00] if they belonged exclusively to the company, but that just was never the case. And in fact, at one point the guru sent us a demand to cease and desist from soliciting her employees during this period.
Michael: Wow. What a dumpster fire! Let’s take a quick break. And when we come back from commercial, we can discuss what went wrong and how things could have gone differently.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m [00:16:00] your host, Brad Adatto and I’m still here with my cohost Michael Byrd and our special guest, Jay Reyero.
Michael: Listening to this story was surreal because I wasn’t that involved with it when it was happening so I would hear things anecdotally, but hearing it altogether was crazy. I’m sure it was just as crazy for our audience and you two who were dealing with this in real time. So my question is where did it all go wrong?
Jay: It’s easy to save it. I mean, I have to say the beginning and in any business venture, there’s a plan, but more importantly, you have to understand the details of the plan. It’s only then you can understand all the moving pieces and identify the risks. I mean, knowing the risks is going to help you evaluate the deal. You can decide which risk you’re okay with or which risks you’re not okay with and that you want to address. And if you can’t mitigate the risks you want to address, you don’t do the deal. But if you do the deal, at least you know how to protect yourself.
Brad: And again for those who’ve listened to us before, we talk about risk tolerance all the [00:17:00] time, you know, are you afraid to step out of the shower? You’re going to jump out of a perfectly good airplane. And so I agree with you. And in this scenario we weren’t there in the beginning, so we didn’t have the opportunity to really lay out, you know, how things could be done differently.
Michael: So Brad, what would you have done differently?
Brad: You know, I mentioned that whiteboard earlier in the podcast, and that would be definitely, would have been one of those situations where we had brought the client and most likely the other parties in, for an early whiteboard to map out what are they trying to do? All these questions were that we were attempting as now to kind of clean up this whole mess would have been asked during the initial whiteboard meeting, we would have had a chance to at least have developed a clear picture of who would be doing what and how the funds would flow throughout this entire model.
Jay: And this may sound simple, but it is incredibly important because it really does two things for us. First, it helps us identify any red flags or potential issues with kind of what they’re trying to do. And especially in healthcare is [00:18:00] we always talk about where it’s highly regulated. Failure to do things right at the beginning can create massive risks. And the second thing it does is it allows us to speak to our clients expectations, meaning we can help them about, Hey, wait the deal based on what they truly want from it. But compared to what is actually being planned and many of the aspects of the deal in our client’s story, just in a vacuum war, unusual or unreasonable, we’ve seen many of them in other successful deal for.
Michael: What do you mean?
Jay: Well, for example, there are a lot of deals that we’ve reviewed for clients where the opportunity is essentially a turnkey operation. It’s a fancy way of saying that the other party has all the resources needed to run the business. Many times you get the benefit of creating something of value while the work is exclusively handled by the other company.
Michael: Well, Brad, that didn’t sound like too bad of a deal. You get to make money while the other people do the work.
Brad: True and that does sound good, but sometimes you need to see that big picture [00:19:00] first. I would be a bad healthcare attorney if I didn’t mention that before anything, you have to address the healthcare compliance aspects of a deal. By setting aside that for now a client has to understand what it means to be part of a turnkey operation. You are completely dependent on the other company to run that part of your business. Without them you’re unusually unable to continue because they have all the resources, they have the know-how they have sometimes in this case, protective covenants preventing you from competing and when they leave, they leave with everything and you have got nothing.
Michael: Well, yeah, but couldn’t you just hire another company to come in and do the same thing?
Brad: Yeah, sure. Assuming there’s a smooth transaction or a known timeline for winding down that relationship. Yet if things deteriorate quickly, which happens often, the other party can become very uncooperative and like in our client’s case, it becomes much more of a difficult transition.
Michael: Jay, are there other issues to consider with these [00:20:00] turnkey type operations?
Jay: Yeah. And I think it relates to value if there’s an expectation of creating something of value, especially if there’s a goal for our client for a sale later on down the road. The client has to understand that they may not be necessarily building something as valuable or even of value, the intellectual property, the trade secrets, proprietary information, all other confidential information that’s kind of created during or affiliated with this business operation. That all belongs typically to the contracted third party and these are some of the most valuable assets a business can have.
Michael: So in our client’s case, if you’d have had this whiteboard at the front end, you would have been able to have deeper conversations with him on what his deal actually was to make sure his expectations matched what the business would have offered him.
Jay: Absolutely. And as you can tell from the story, because we weren’t there in the beginning, our client’s expectations did not align with what was actually [00:21:00] happening and behind the scenes.
Michael: Though in this case, it sounds like the guru had an agenda and created those expectations through her representations. Brad, how could you have dealt with this in the beginning? Especially if you’re relying on everything the pitch man and the guru are saying about a business opportunity they’re bringing to the table.
Brad: So let’s take a step back, going back to our podcast and season one, we had an episode called a handshake exposed where we talked about the risks of a handshake, you know, and here are the parties we’re all operating essentially a handshake deal. While as Jay mentioned early on, there was some basic documents in place, but they lacked any real substance of documentation creating what protections we would have had in place. Have we had the chance at the beginning to analyze everything being pitched we would have a chance of saying this is what you need, and this is what’s missing. And we wouldn’t recommend you guys go forward without these elements put together and whatever the contract that was needed. [00:22:00]
Jay: And as Brad and I talked about, and we talked about earlier, we tried to put these things in place at various times, but it was just too late. I mean, the business was already operational, money was being made. There was little incentive for the pitch man or the guru to cooperate and sign because let’s face it, it would only hurt them and they already had what they wanted. So it becomes much, much more difficult to address these types of issues once that first dollar hits the door. And that’s why we always try to get everything ironed out up front.
Michael: So in the end, where did things end up?
Brad: Well, the dumpster continued to burn bright and at the end the company went out of business and our client ended up not salvaging anything. We discovered eventually that while the guru claimed to be a, there are millions of dollars in accounts receivables for potential revenue. The vast majority of them are so old and the prospect of actually collecting them was almost zero. And so basically everything was worthless.
Jay: And we also discovered unsurprisingly that [00:23:00] both the pitch man and the guru had set up a competing business at some point during this entire period and had been siphoning off potential surgeries and customers. And at one point they even had an employee cover a case that was provided by this competitor, but while still wearing the uniform of our client’s company logo.
Michael: Wow. What a dumpster fire. The takeaway here is that starting earlier with a white board may have sniffed out that these are bad actors before the fire really even got started and of course eventually got out of control.
Brad: Yeah. If they had that white board from the start, they could have contained these bad actors or at least minimized how bad they got burned.
Michael: Maybe not as big of a dumpster fire as uncle Rico here, whipping on a tackle and watching as his rival runs down the sideline for a touchdown leading your team to lose the game.
Brad: Hey, again, I almost made it to the big show, Michael.
Outro: Please join us for next week when we talk about [00:24:00] biting off more than you can chew on February 10th. Thanks again for joining us today and remember, if you liked this episode, please subscribe, make sure to give us a five star rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our website 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.