Former HDL CEO Mallory Sues Richmond Law Firm

Facing $1 billion in claims, Mallory seeks $150 million from legal adviser LeClairRyan

CEO SUMMARY: It’s a case of the client turning on the law firm. The former CEO of Health Diagnostic Laboratory is suing the law firm that advised her and her lab company on major legal matters. LeClairRyan of Richmond, Va., previously settled certain allegations with HDL’s bankruptcy trustee for $20.375 million. Now Mallory hopes to win $150 million by suing LeClairRyan. Many lab executives and lawyers will be watching to see if new legal precedents emerge from this case.

FOR A LAW FIRM IN RICHMOND, VA., the new year brought unwelcome news. On Dec. 27, Tonya H. Mallory, the co-founder and former CEO of Health Diagnostic Laboratory in Richmond, filed a lawsuit in the civil division of the Richmond City Circuit court. Mallory is suing LeClairRyan, HDL’s former law firm, for malpractice.

In the lawsuit, she accused the firm of giving bad legal advice that contributed to HDL’s downfall, according to reporting by John Reid Blackwell, who has covered the cases for the Richmond Times-Dispatch.

Mallory seeks at least $150 million in damages. Founded in 1988, LeClairRyan has 320 attorneys in 27 offices in 16 states and describes itself as an entrepreneurial law firm that provides business counsel and client representation in matters of corporate law and high-stakes litigation. Its largest office is in Richmond.

One reason for the lawsuit appears to be Mallory’s concern that she faces “multiple lawsuits seeking damages in excess of $1 billion,” Blackwell reported.

Blackwell interviewed Mallory about the lawsuit. In the interview, she told Blackwell that the $1 billion includes potential claims she faces from the bankruptcy estate of HDL and from a federal lawsuit.

In her lawsuit, Mallory claimed she received “incorrect legal advice given to her by several LeClairRyan lawyers over a several year period of time from 2008 through 2013,” Blackwell wrote. (See our special issue of THE DARK REPORT, Sept. 14, 2015, for details the federal government provided in court filings against HDL and other laboratories, “Feds Show How Labs Took $500 Million from Medicare.”)

In 2008, Mallory co-founded HDL as a clinical lab company focused on doing blood sample tests for early signs of heart disease and diabetes, Blackwell explained. As CEO she drove the company to expand in Richmond, hiring hundreds of employees and building a new office and clinical lab. Within six years, however, she resigned as federal fraud investigators looked into the company’s practices of paying fees to physicians for collecting patients’ blood samples and sending them to HDL.

In her lawsuit, Mallory charged that legal advice from LeClairRyan “led to catastrophic results,” including leaving Mallory potentially liable for staggering amounts owed as a result of the lab’s business practices, Blackwell wrote. He added that a lawsuit federal investigators are bringing against Mallory is about to go to trial in South Carolina. That case was scheduled to start in December but has now been moved to a later date.

Law Firm’s Response

For its part, LeClairRyan responded to a request for comment by saying the lawsuit was, “nothing more than an attempt by (Tonya) Mallory to avoid taking responsibility for the actions that she took on her own at HDL,” Blackwell reported.

“We are disappointed that she elected to proceed in this fashion, and we flatly reject any notion that our firm is responsible to Ms. Mallory for her decisions,” the law firm added. “We stand by the legal counsel that we gave to our client, HDL, and we have already resolved all matters relating to HDL with the bankruptcy trustee of HDL.”

In the lawsuit, Mallory’s attorney described a relationship between his client and LeClairRyan that began “back in the 2000s.” At the time, the law firm’s co-founder, Dennis Ryan, advised Mallory on the establishment of HDL. Also, LeClairRyan defended Mallory when her former employer, Berkeley Heartlab, sued her to prevent HDL from soliciting business from Berkeley’s customers, Blackwell wrote.

One charge central to the federal government’s case against HDL was the payments the lab company made to physicians to process and handle patients’ specimens when sending those specimens to HDL. The federal government has made it clear that paying processing and handling fees to physicians is not allowed and may violate federal anti-kickback law.

‘Process and Handling Fees’

“The lawsuit claims that after HDL was formed, LeClairRyan repeatedly advised the company that it legally could pay ‘process and handling’ fees, or P&H fees, to medical practices as reimbursement for the cost of collecting blood samples from patients to be sent to HDL’s Richmond lab for testing,” Blackwell wrote. “Those fee-paying practices ultimately led to several whistleblower complaints and a federal investigation into whether HDL violated anti-kickback laws by paying doctors as an inducement to order HDL’s tests.”

Soon after HDL was founded, Mallory asked LeClairRyan for advice on whether paying fees to physicians for collecting blood samples at their medical practices could be a violation of anti-kickback laws, Blackwell reported. The lawsuit shows that in 2009 and 2012, LeClairRyan advised Mallory that HDL’s reimbursement practices met the requirements of the law, he added.

LeClairRyan’s Legal Opinion

“Specifically, the lawsuit claims that on April 27, 2012, LeClairRyan gave HDL a legal opinion that the company’s payment practices would fall under the ‘safe harbor exceptions’ of the anti-kickback statutes and the False Claims Act,” Blackwell wrote. Not all members of the firm agreed with that assessment, however, he added.

In April 2015, HDL agreed to pay $47 million to settle charges the federal government brought against HDL. At the time, HDL did not admit any wrongdoing. In June 2015, HDL filed for bankruptcy protection, he added.

The end result of the bankruptcy filing was that HDL sold its assets and laid off hundreds of staff members, Blackwell reported. (See TDR, Sept. 26, 2016.)

In September 2016, LeClairRyan agreed to pay $20.375 million to settle with HDL’s bankruptcy estate, Blackwell wrote. Six months later, in March 2017, Dennis Ryan and two former HDL executives—Joseph McConnell and Satyanarian Rangarajan—agreed to pay $28.8 million to HDL’s bankruptcy estate, while not admitting any wrongdoing, he added. Of that amount, Dennis Ryan agreed to pay $5 million, he reported, while noting that Dennis Ryan left the law firm in 2012 to work as HDL’s executive vice president.

Mallory has since co-founded Creo Wellness LLC, a Henrico County-based corporate wellness firm, and said she lacks the financial resources to settle the claims against her, Blackwell wrote.

There may be something noteworthy that emerges as a consequence of the collapse of Health Diagnostic Laboratory, along with its federal settlement, the ongoing federal civil case against individuals involved with HDL, and the actions of the HDL bankruptcy trustee.

A Noteworthy Development?

That noteworthy development might be that law firms are now at increased risk if they write legal opinions for client laboratory companies that do not reflect a conservative interpretation of the federal anti-kickback and Stark self-referral laws as well as other statutes.

There are laboratory companies today providing physicians with legal opinions that conclude certain forms of inducements offered by the lab do not violate federal and state laws. It may be that the precedents of the HDL case and its associated lawsuits will put such law firms at greater risk of unwelcome litigation.

Richmond Federal Judge Sides with HDL’s Cofounders, Saying They Could Sue Law Firm

IN JULY, NEWSPAPERS IN RICHMOND, VA., reported that a judge in the Health Diagnostic Laboratory case ruled that it was possible for the former executives of HDL to sue its former law firm, LeClairRyan. The national firm with offices in Richmond had provided legal advice to HDL since the blood-testing lab was founded in 2008.

The judge, John A. Gibney Jr., filed his opinion on July 14 in Richmond federal court as a result of an appeal filed by HDL’s founders Russell Warnick and Tonya Mallory, Michael Schwartz reported for Richmond Biz Sense. Warnick and Mallory sought to preserve their ability to pursue legal claims of their own against LeClairRyan related to its past representation of HDL insiders individually, he wrote.

Previously, the court handling HDL’s bankruptcy filing approved a $20 million settlement that LeClairRyan agreed to pay to HDL’s bankruptcy estate. Warnick and Mallory were concerned that the language in the agreement could be interpreted as preventing them from being able to individually deflect blame for the company’s downfall from themselves to the law firm, Schwartz reported.

Gibney ruled that the agreement to pay HDL’s bankruptcy estate doesn’t read that way, he added. “The ruling also affirmed the prior approval of that $20 million settlement, which had already been signed off on by HDL and LeClairRyan and the bankruptcy court, but was held up by Mallory and Warnick’s appeal,” Schwartz reported.

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