Bankrupt Boulder, Loveland dermatology clinics sue seller

BOULDER and LOVELAND — Two area dermatology clinics that filed for Chapter 11 bankruptcy protection in March have filed an adversary complaint against the founder of one of the clinics, alleging that financials for the clinic were falsified prior to sale of the practice, and that the seller wrongfully paid himself from the clinic’s revenues.

Lake Loveland Dermatology PC, which operates at 776 W. Eisenhower Blvd. in Loveland, and Skin PC, which operates as Ideal Dermatology at 905 Alpine Ave. in Boulder, filed for bankruptcy in U.S. Bankruptcy Court in Denver, March 8. Also filing was the owner of the clinics, dermatologist Kevin Mott.

The bankruptcy case has opened a window on alcohol use, regulation of medical professionals, lease agreements, and the legal, accounting and financial pitfalls that can confront individuals looking to buy or sell a business.

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Lake Loveland Dermatology was founded in 1979 by Patrick Lillis and sold to Mott — through Skin PC — in 2016 in exchange for a promissory note for $8.7 million, according to court documents.

Mott purchased the clinic in order to expand into the Northern Colorado market, but the company “is not generating sufficient revenue to maintain payments on the note,” according to documents filed with the bankruptcy court.

Now, Mott has taken the case one step further, by filing an adversary complaint against Lillis in bankruptcy court. An adversary complaint is a separate civil lawsuit that is filed by a party in a bankruptcy case.

The adversary complaint, made May 2, was filed on behalf of Mott, Lake Loveland Dermatology and Skin PC. Defendants in the case are Lillis and his wife, Tracy Amick, who doubled as office manager for the Loveland practice.

Lake Loveland Dermatology is represented by Allen Vellone Wolf Helfrich & Factor PC, a Denver-based law firm. Messages left for attorneys at that firm were not returned.

Skin PC is represented by Kutner Brinen PC of Denver. Attorney Lee Kutner declined to comment.

Mott is represented by Goff & Goff LLC, a Boulder law firm. Attorney Lance Goff declined to comment.

Lillis is represented by Markus Williams Young & Hunsicker LLC of Denver. Jennifer Salisbury, an attorney with that firm, did not immediately respond to a request for comment. Lillis could not be reached for comment.

The complaint alleges that, prior to the sale, Lillis paid himself a $1 million “officer’s salary” during a period in which his license to practice medicine was suspended, causing the clinic to become insolvent, and that he and Amick  caused promissory-note payments to Lillis to be paid out of Lake Loveland Dermatology revenue — money the plaintiffs say should have gone to vendors.

Lillis’ license issues with the state began on Sept. 27, 2010, according to documents filed with the Colorado Division of Professions and Occupations, when he was stopped by law enforcement on Colorado Highway 119. Lillis was charged with driving under the influence and subsequently pleaded guilty in May 2011.

That resulted in a letter of admonition in November 2011 from the Colorado Medical Board, with Lillis placed on probation for five years while simultaneously agreeing to refrain from consumption of alcohol, according to Division of Professions and Occupations records.

But the state suspended Lillis’ license in 2014 after he failed a urine test.

“In May of 2014 the board received information that Lillis was using alcohol in violation of the terms of his probation, and required him to submit to a urine test, which he failed,” according to the court filing. “The board suspended Lillis’ medical license on July 25, 2014.”

That pattern continued, with the board and Lillis agreeing to another five-year probationary period during which he agreed to abstain from using alcohol. But Lillis again failed a urine test for alcohol in October 2015, at which time his license was suspended again, followed by another suspension in early 2016, and a relinquishment of his license, effective Sept. 28, 2016.

The bankruptcy-court complaint alleges that Lillis — between October 2015 and October 2016 — caused Lake Loveland Dermatology to pay him an “officer’s salary” of approximately $1 million.

“Prior to the suspension of his license, Lillis had not drawn an officer’s salary,” the complaint states. “One million dollars annually was an unreasonable amount to pay himself. The minimal work Lillis performed for LLD did not justify a salary remotely approximating $1,000,000,” the complaint continued.

Payment of that salary resulted in delay in the payment of LLD’s outstanding debts to vendors, according to the complaint. The complaint states that two physicians employed by LLD objected to Patrick Lillis paying himself the salary, with Patrick Lillis causing LLD to terminate its relationship with those physicians “in retaliation.”

Departure of the physicians — who generated the majority of LLD’s revenue — caused the clinic’s revenues to decrease substantially, according to the complaint.

“Due to the departure of [the physicians] and the deterioration of goodwill caused by Lillis’s suspension and ultimate surrender of his license, the value of LLD had dropped precipitously by October 2016,” according to the complaint.

“Because only licensed physicians may own medical practices, after he relinquished his license, Lillis was required to sell LLD to a licensed medical practitioner to avoid forfeiting the practice entirely,” the complaint states. Lillis then approached Mott, who also practiced at LLD, about purchasing the practice.

“Lillis called Dr. Mott in a panic and informed him that he had to take over the practice immediately,” the complaint states, “because Lillis had failed another UA and would now receive the ‘death penalty’ from the Board.”

The complaint alleges that Lillis inflated the value of Lake Loveland Dermatology prior to the sale.

LLD’s value on Sept. 30, 2016, was between $1.17 million and $1.29 million, Mott asserts, but “Lillis, however, presented Skin and Dr. Mott with false financials intended to support Lillis’s fabricated practice value of $8,759,000.”

“To prevent Dr. Mott and Skin from conducting adequate due diligence, Lillis insisted that time was of the essence because at any moment the Board would close the practice and thereby prevent its sale and render it unable to provide patient care,” the lawsuit states. “When Dr. Mott indicated that he intended to hire counsel at Caplan & Earnest to represent him in the transaction, Lillis informed Dr. Mott that there was not enough time for Dr. Mott to select counsel of his choosing, and that he, Lillis, would choose a lawyer to represent Dr. Mott in the transaction. This is in fact what happened.”

Skin was the borrower on a 10-year promissory note, with Mott guaranteeing the note, according to the filing. Lillis was to be paid out of profit distributions to Skin. Sale of the practice closed on Oct. 16, 2016.

Lake Loveland Dermatology agreed to retain Lillis as chief operating officer, and he retained signatory authority on LLD’s bank accounts. Amick also had signatory authority on all but one bank account, the filing states.

As Skin was not able to make payments on the note, Lillis and Amick “devised a scheme to cause LLD to pay Skin’s obligations under the Note,” according to the complaint. That alleged scheme entailed LLD making payments to Lillis out of LLD’s revenue before LLD paid its own debts or vendors, according to the filing.

“While serving as chief operating officer, with Amick’s knowing and substantial assistance, Lillis caused LLD to transfer $449,887 to Lillis in satisfaction of Skin’s monthly payment obligations,” according to the complaint.

“At times, because Lillis caused LLD to transfer funds to him, LLD was forced to delay its payroll by weeks.”

“Each month that Lillis caused LLD to transfer money to Lillis in satisfaction of Skin’s monthly payment obligations, payments to countless creditors were not made or delayed, often by many months, as Lillis deprived LLD of the funds to make such payments.”

That caused LLD’s outstanding obligations to vendors to balloon to $150,000 by February 2018, according to the filing.

Lillis eventually resigned as LLD’s COO, and Amick resigned as the company’s bookkeeper. LLD hired Pinnacle Healthcare Consulting in March 2018 to take over operational and financial management of the practice, with Lillis and Amick providing training to Pinnacle representatives.

“As part of this training, Lillis and Amick instructed Pinnacle to continue to pay the Note from LLD’s funds before LLD paid any other vendor or creditor.” Sums paid to Lillis under Pinnacle totaled at least $540,949, the filing states. Added to the $449,887, the amounts paid to Lillis by LLD totaled at least $990,836, according to the filing.

“Lillis and Amick’s conduct directly benefited Lillis, relieved Skin from making payments it was obligated to make on the Note, and has caused, and continues to cause, LLD, Skin and Dr. Mott significant harm, leading to the filing of the Chapter 11 petitions.”

Mott and the clinics are seeking to have the original amount of the promissory note reduced to an original principal balance of $1.17 million, with credit given for all payments made.

The suit also alleges civil theft, breach of fiduciary duty, unjust enrichment, fraudulent conveyance and other charges against Lillis. The plaintiffs accuse Amick of aiding and abetting breach of fiduciary duty, and accuses Lillis and Amick of civil conspiracy and violation of the Colorado Organized Crime and Control Act.

Attorneys for Lillis have not filed a response to the adversary complaint. However, in a response to a debtor’s motion to compel examination of Lillis and 790 Eisenhower LLC — the entity that owns the building that houses Lake Loveland Dermatology — Matthew Faga, an attorney with Marcus Williams Young & Hunsicker LLC, objected to the examination.

Lake Loveland Dermatology leased space in Loveland and Greeley from 790 Eisenhower LLC, controlled by Lillis. The bankruptcy court approved rejection of the Greeley lease — at 6801 W. 20th St. — on May 8, but the Loveland lease has been neither assumed nor rejected.

The debtors are seeking to examine Lillis and 790 Eisenhower LLC to obtain information on the creation and execution of the leases.

“Even a cursory review of Debtor’s Motion … shows the true nature of the request — to harass Lillis and Eisenhower, unnecessarily drive up fees and costs, and continue to deplete estate resources with frivolous and unnecessary litigation tactics,” Faga wrote.

Issues surrounding leases, as well as the stock-purchase agreement, promissory note and other documents should be addressed in the adversary proceeding, Faga added, which he said contained “inflammatory claims.”

Lillis and 790 Eisenhower LLC also are seeking to compel Lake Loveland Dermatology to pay post-petition rents of $63,172 for April and May rents for both locations.