Debt, lawsuits, big spending led to the death of Laser Spine Institute

TAMPA — The Laser Spine Institute may have closed its doors suddenly in March, but repercussions from the surgery center's business practices continue to reverberate in the courts.

Two local lawsuits provide the clearest picture yet of the forces that led the Tampa company to shut down, resulting in the loss of some 500 jobs. Documents detail a years-long legal battle among three business partners, a penchant for paying large executive salaries and bonuses, and a struggle against mounting debt.

Another factor: ego. At one point, two of the founders dared their partner to sue them, telling him the company was making so much money it wouldn't matter. When the partner called their bluff, his lawsuit ended up being a decisive blow that helped put Laser Spine in the grave.

That case came to a head June 30, when a judge in Hillsborough County Circuit Court awarded Joe Samuel Bailey $260 million in damages, capping what had been a 13-year battle between Bailey and Laser Spine founders, Dr. James St. Louis and Dr. Michael Perry.

Bailey accused them of breach of fiduciary duty, defamation, slander, violation of the Florida Deceptive and Unfair Trade Practices Act, conspiracy and tortious interference.

Following two long bench trials and appeals, he now assumes a majority share in the remains of Laser Spine, which is undergoing an insolvency process. Similar to a federal bankruptcy filing, the process assesses all equipment and other materials Laser Spine owned or controlled and decides what is valuable enough to sell.

PREVIOUS COVERAGE: The fallout spreads after Laser Spine Institute's sudden closing

"My client had his business gutted in 2004, and now we're in 2019 and he still has not received any compensation," said Jennifer Altman, an attorney in Miami who represented Bailey. "This is very much delayed justice. But we're very pleased with the results, which we believe are the correct results."

Bailey's case has been complicated, but well-known in some circles for its often bizarre twists and turns. It is steeped in the health care industry's relationships with marketing, public relations, financing, and the egos of high-profile doctors. And it highlights the executive decisions that appear to have led the company to ruin.

Bailey, the former marketing consultant for the Bonati Institute in Pasco County, once worked with St. Louis and Perry. In 2004, they founded the Laserscopic Spinal Centers of America, Inc., and its holding companies. The practice began treating patients with minimally invasive spinal surgery.

At the time, Laserscopic's business model was unique, according to a 2016 appeals court document, and St. Louis was one of fewer than 10 surgeons in the country who specialized in endoscopic minimally invasive spine surgery. Bailey, Perry, St. Lous and another partner, Ted Suhl, became the company's four directors and held ownership interest.

Revenue jumped from around $100,000 in August 2004, to $250,000 that September. By that October, it hit $650,000, court documents show.

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The early growth caught the interest of an investment company, EFO Holdings L.P.

William Esping and Robert Grammen, partners in EFO, offered to invest $3 million in Laserscopic Spinal in exchange for 55 percent of the company, control of its board of directors and a 7 percent return on its vested capital. Court documents detail how Bailey felt pressured.

"You're going to accept this offer or we're going to take your doctors and we're going to take your company. And we're going to go up the street and we're going to do it ourselves," Grammen said to Bailey, the documents say. St. Louis, Perry and their attorneys did not respond to requests for comment.

Two days after EFO's offer to invest, St. Louis and Perry told Bailey they were leaving Laserscopic Spinal to create a competing company with the EFO investment firm. Court documents say that St. Louis and Perry met privately with Esping and Grammen on several occasions. They then formed the Laser Spine Institute just 22 days after issuing their original offer to Laserscopic.

Bailey claimed in court that Laser Spine was created using Laserscopic's business plan, and it pulled employees away, including Laserscopic's entire surgical team.

But the name-calling went both ways. Court documents show that St. Louis and Perry told Laserscopic employees that Bailey was stealing corporate assets and was a "wanted felon" with possible sexual offenses. Those allegations were determined to be unfounded in court. To lure employees over to Laser Spine, St. Louis and Perry allegedly told them that Bailey planned to fire them.

Bailey claimed in court that, when he tried to hire new spinal surgeons, St. Louis, Perry and Grammen offered to pay the specialists not to work for Laserscopic.

RELATED: What's left of Laser Spine Institute? A consultant tries to pick up the pieces.

When threatened with litigation, St. Louis and his team told Bailey they were not concerned because "the business would make 10 times whatever damages they might have to pay in a lawsuit," according to a Dec. 2018 document filed in a district court of appeal in Florida.

The case was heard in two trials and underwent two appeals. On Jan. 30, 2017, a judge awarded Bailey $6.85 million in damages, which came after a lower court awarded him $1.6 million.

Laser Spine appealed both decisions, a move that ended up backfiring when the judge awarded Bailey $260 million last month.

The first trial started in 2010.

"It was very unusual. The trial started in July and it was held for two weeks in July, then April then May, for six weeks altogether. It took over a year, almost," said Altman, the attorney for Bailey. "It's unorthodox to have a trial that takes a significant period of time like that. It took the judge 15 months to issue a ruling."

The final judgment factored in interest over a number of years, Altman said. "We appealed originally in 2016 because the award was woefully insufficient. So we went back to trial and argued all over again."

It's possible that Laser Spine could appeal this decision again, Altman said. But a new lawsuit claims Laser Spine knew for years that the Bailey case could destroy the company.

The suit was filed in June by Soneet Kapila, a managing partner of the KapilaMukamal insolvency consulting firm, which has been appointed to collect and distribute Laser Spine's remaining assets in the insolvency process.

Kapila's complaint, filed in Hillsborough County Circuit court, claims that Laser Spine incurred more than $150 million in debt in 2015. During this time, the company's executives unlawfully took $110 million from a loan and distributed it among themselves and shareholders, the lawsuit alleges, even though the company still faced millions of dollars in pending lawsuits, including the Bailey case.

Among the more prominent shareholders who received distributions, according to the suit: Outback Steakhouse co-founder Chris Sullivan and billionaire developer Edward John "Eddie" DeBartolo Jr.

Meanwhile, according to the suit, Laser Spine continued to pay "exorbitant" salaries and bonuses to employees while taking no action address the company's debt. It's expenses included a new $56 million custom-built corporate and surgical facility in Tampa that opened in 2016.

Kapila's complaint said Laser Spine was considered a profitable, nationally known institute that had generated revenues of $115 million in 2010, increasing them every year through 2014 to $268 million. But in 2015, the complaint said, the company admitted it was in "dire need of immediate liquidity."

That's when it took out the $150 million loan, with Texas Capital Bank.

The company laid off 70 employees in 2016, about 6 percent of its workforce. By 2018, Laser Spine was in severe financial stress, Kapila's complaint shows.

When the company finally shuttered for good in March, its CEO, Jake Brace, blamed the distress on the banks: "(They) precipitously and surprisingly made the decision to freeze the company's accounts and strip the cash out of these accounts," he said in a statement. The action, he added, took away the institute's "operating flexibility," and efforts to find other financing failed.

The scenario he described unfolded over a handful of days before the closure, when Laser Spine was "forced to wind-down and cease operations and liquidate the collateral for the benefit of the banks."

But Kapila's assessment suggests Laser Spine's executive team had been aware of the problems for years, and made no meaningful attempts to address the ever-growing debt.

Meanwhile, legal action is brewing on still other fronts. Former Laser Spine employees have filed a class-action lawsuit against the company, claiming damages of up to $7 million for not providing them with up to 60 days notice of termination.

Contact Justine Griffin at jgriffin@tampabay.com or (727) 893-8467. Follow @SunBizGriffin.