Nazarian Sues Partners

There is a story unfolding in Philadelphia that will give nightmares to every orthopedic surgeon who has considered selling his or her group practice to a hospital. The alleged culprit in this nightmare is not the hospital, but your very own partners looking out for their own best deal.

“Blatant Betrayal”

In a lawsuit filed on March 11, 2013, in the Court of Common Pleas, Philadelphia County, David Nazarian, M.D., accuses his former partners of duping him into agreeing to sell their practice to Aria Health. Nazarian accuses Drs. Robert Booth, Richard Balderston, Arthur Bartolozzi and Philip Maurer of “blatant betrayal of fiduciary and contractual obligations” in the connection with the sale of 3B Orthopaedics, P.C. (3B) to Aria Health.

3B is a high volume, high profile orthopedic practice. Booth was the primary developer in 2006 of Zimmer Holdings, Inc.’s Gender Solutions High-Flex Knee. The knee was touted by former Zimmer CEO Ray Elliot as the first knee replacement to fit a woman’s anatomy.

Nazarian joined 3B in 1997 and stayed until December 31, 2012, when he was terminated.

Employer to Employee

The lawsuit takes place in a new health care environment where hospitals are buying up private orthopedic practices in droves and surgeons are becoming employees of the hospital.

John Tongue, M.D., president of the American of Academy of Orthopaedic Surgeons (AAOS) recently wrote in AAOS Now that factors contributing to this trend include “decreased reimbursement, increased regulatory requirements and the option to shift liability costs to the hospital. From 2004 to 2010, the percentage of respondents to the biannual AAOS member survey who are in solo private practice dropped by 28%, while the percentage of respondents who are hospital employed increased by more than 300%.

Sale to Aria Health

Nazarian and his partners made their choice in 2012 to sell their practice to Aria Health for approximately $8 million. Booth told Philadelphia Inquirer’s Harold Brubaker last December that the move to become employees of Aria Health was driven by a desire to expand 3B’s footprint in the region. The group had been an independent practice at Pennsylvania Hospital, part of the University of Pennsylvania Health System since 1998.

“Without growth it’s not going to be possible in the contemporary world to continue practicing, ” Booth said. “The economic pressures are pretty obvious. Everyone is reimbursing less every year.”

Brubaker reported that neither Kathleen Kinslow, chief executive of Aria, nor Booth would disclose the lengths of the employment contracts for the 3B partners, who initiated the talks with Aria. Kinslow was executive director of Pennsylvania Hospital before taking over at Aria two years ago and had been thinking about expanding orthopedics at Aria. The hospital currently performs 2, 500 inpatient and outpatient orthopedic cases annually. With 3B, that figure is expected to reach 6, 000.

In connection with the move, Aria created the Aria 3B Orthopaedic Institute (Aria 3B), with 50, 000 square feet of office space, 8 operating rooms, and 30 private inpatient rooms.

“Deceit, Harassment, Intimidation and Unethical Conduct”

While the 3Bs and Maurer become employees of Arias Health, Nazarian won’t be joining them. He was offered an employment contract, but declined before the offer was withdrawn. He says in his lawsuit that he did not wish to continue working with his former partners due, in part, to “multiple instances of deceit, harassment, intimidation and unethical conduct.” Instead he accepted a position at Pennsylvania Hospital.

In his lawsuit Nazarian claims his employment with 3B was terminated after he accepted the position with Pennsylvania Hospital. He said his former partners had accepted new positions with Aria Health and were not required to resign.

He’s also claiming that his former partners will not pay him his share of the sale of the partnership, nor will they share the documents related to the sale of the business until he agrees not to sue them. He claims he’s owed in excess of $800, 000.

But perhaps the worst charge is that his former partners lied to him when they promised to share proceeds of the sale equally, pay him his bonuses and let him keep all accounts receivables (AR) of his patients. On the condition of those promises, as a shareholder, he agreed to the sale to Aria Health. Additionally, he says 3B is stonewalling his patients when they try to get their records, including X-rays to follow him to Pennsylvania Hospital.

Nazarian’s Value

3B is a professional corporation whose shareholders consist of Booth, Balderston, Bartolozzi, Maurer and Nazarian. Nazarian owns 12.5% of the shares of 3B. The corporation is in the process of closing down.

Nazarian’s employment agreement entitled him to a salary of $210, 000 per year plus bonuses determined by the board in advance of the contract year. Bonuses take into account a shareholder’s share of collections, contributions to the medical practice, patient production and other factors.

According to the court documents, Nazarian and 3B agreed to the lower salary in exchange for higher quarterly bonuses. Compared to the other physicians, Nazarian received a disproportionate amount of his compensation on bonuses.

The surgeon had a good year in 2012. 3B financial statements showed that Nazarian was the most productive member of the practice, with the highest amount of patient receipts from medical services. He received bonuses of $260, 000 and $235, 000 during the first two quarters of the year. He claims similar bonuses were due at the end of the third and fourth quarters of 2012.

The Decision and Alleged Promises

The 3B shareholders, including Nazarian, met on July 25 and again on August 13, 2012 to discuss the proposed sale to Aria Health. 3B’s corporate counsel, Henry Fader, attended the meetings. Fader, according to the lawsuit, allegedly asked the shareholders at the July 25 meeting how proceeds of the sale should be distributed. Balderston, 3B’s financial manager, said the proceeds would be divided equally among the five shareholders. Nazarian says he trusted and relied on Balderston’s statement and that the other shareholders affirmed the equal division of proceeds.

Additionally, says Nazarian, the shareholders agreed that stock ownership in 3B would be redistributed equally to allow for the equal division of the proceeds. That agreement was communicated to Aria Health, which referred to the agreement in employment negotiations with Nazarian.

Also at the meetings, the shareholders agreed when any of the shareholders went to work for Aria Health, all of the ARs attributable to that shareholder would be paid out. According to the suit, each shareholder specifically told Nazarian that he would receive 100% of the ARs attributable to his patients.

The shareholders approved the sale to Aria Health at the August 13 meeting by majority vote. Nazarian voted in favor of the sale based on the representations that he would receive 20% of the proceeds of the sale and 100% of his ARs.

Bait and Switch?

After the vote, the defendants told Nazarian that the sales proceeds would be divided based on current stock ownership. Nazarian claims the defendants met amongst themselves prior to the August 13 vote and deliberately excluded him from the meeting.

After the vote, 3B entered into agreements to sell its intellectual property for $3.5 million, and its assets for $498, 607, for a total of $3.998 million. The sale was consummated in early 2013 for that amount. The assets included original patient records, including those treated exclusively by Nazarian. The assets did not include ARs.

Nazarian’s Charges

Nazarian requested copies of the executed sales agreement, but said he was denied access to the documents.

Nazarian says the defendants have failed and refused to distribute the stock ownership and 20% sales proceeds he was promised. They have even refused to pay him the 12.5% share based on current stock ownership. They have received their shares of the proceeds. He says they are withholding the proceeds conditioned on his agreement to release all claims against them. He believes his portion is being held in escrow.

They have also refused to pay him his ARs or bonuses earned during the third and fourth quarters of the year. Based on 3B financial statements, Nazarian’s unpaid bonuses amount to nearly two-thirds of the total bonuses in the partnership.

When his patients called 3B at the new hospital (Aria 3B), he says they were met with opposition and were encouraged to be seen at Aria 3B instead of by Nazarian. Those patients have had to have medical procedures, such as X-rays, repeated, “jeopardizing the patient’s health and medical care.”

This is a “misuse of patient records” in an attempt to retain Nazarian’s patients at Aria 3B, “in blatant violation of patient rights under state and federal law, ” states the lawsuit.

Nazarian accuses the defendants of Breach of Contract as a shareholder. He is owed, at minimum, (12.5%) or $499, 825.

He also accuses the defendants of Breach of Contract as an employee. He wants his bonuses, plus $50, 000 and expenses. Under Pennsylvania state law he says he is entitled to recover attorney’s fees and liquidated damages in an amount equal to 25% of the total amount of bonuses due.

He also claims they failed to exercise their fiduciary duties owed to him as a shareholder. “Defendants were in a position of trust and confidence, ” and were obliged not to engage in “self-dealing or conflicts of interest.”

They negotiated a deal for themselves “that benefited only themselves.” He says their behavior was “intentional, outrageous and wanton, justifying an award of punitive damages.”

Nazarian’s Demands

Altogether, Nazarian’s suit consists of ten separate counts, each demanding at least $50, 000 plus punitive damages, in addition to his share of the sales proceeds, bonuses and ARs estimated at over $800, 000. He’s also asking the court to appoint a Receiver to assure that 3B’s business and accounts are wound up consistent with the obligations due Nazarian.

No court date has been set. While this story may give you nightmares, you can wake up. The 3Bs, Maurer and Nazarian have to live through it. Their lessons may inform future decisions surgeons make when contemplating a sale of their practice to a hospital.