Judge grants class-action status in suit over controversial $164M radiology practice sale

A Colorado judge recently granted class-action status to a long-running lawsuit over the sale of a radiology practice. 

The dispute dates to December 2017 when Colorado Springs-based Envision Radiology became 100% owned by employees for an aggregate price of about $164 million. Technologist and former employee Robert Harrison and his attorneys filed suit in January 2021, claiming shareholders grossly overpaid, among other contentions.

Envision Radiology had sought to quash the suit, believing Harrison and colleagues “failed to assert any plausible claims of wrongdoing.” But Judge Charlotte N. Sweeney on Jan. 24 certified the suit’s class-action status, allowing the matter to move forward.

“With this ruling, the court emphasizes that certifying plaintiffs’ class is in no way dispositive of their underlying claims,” concluded Sweeney, with the U.S. District Court for the District of Colorado. “‘In determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met.’”

Envision Radiology (no relation to the Nashville multispecialty group) had previously considered selling to the Center for Diagnostic Imaging (now Rayus Radiology) for about $150 million. However, the practice’s owners at the time—Darrel Creps III, Paul Sherwood, and Jeff Jones—were not ready to relinquish control of the company, attorneys claim. They devised a deal where Envision’s employee stock ownership plan (ESOP) would buy the company, according to court documents.  

But the plan did not have enough money to buy Envision. Instead, the ESOP borrowed more than $103 million from the sellers and nearly $51 million from the company. Following the transaction, any retirement contributions Envision made to employee participants’ accounts were used, first, to pay interest owned on this debt.

“The imprudent and disloyal transaction terms caused ESOP participants to suffer monetary losses in their retirement accounts,” the original complaint contended.

Harrison further claimed that employees were not given a chance to negotiate the stock pricing. The final deal “inexplicably” had the plan paying two different share prices for the same Envision stock, plaintiff attorneys charge. About 64,000 shares went for $1,770 apiece while the remaining 36,000 went for $1,404. Participants allegedly later learned that the stock could be worth as little as $349 apiece.

“There is no clear reason why the ESOP would pay $366 more per share for nearly two-thirds of the Envision stock,” the complaint said. “According to the Articles of Incorporation for Envision, the company has only one class of shares,” it added, noting that the disparity would amount to a $23.4 million overpay by the buyers. 

Harrison and colleagues contend that the practice owners “handpicked” the trustee overseeing the sale, who purportedly did not have employees’ best interests in mind. 

“Defendants in the case were fiduciaries to the [employee stock ownership plan], and the law required them to act in the best interests of the employee-participants,” Washington-based law firm Cohen Milstein Sellers & Toll PLLC said in a recently published update on the suit. “Instead of fulfilling these duties, the complaint alleges that the defendants caused the ESOP to pay inflated values for the Envision stock. This lawsuit seeks to restore to the ESOP the amount it overpaid for Envision stock and to disgorge all ill-gotten profits defendants obtained in the ESOP transaction.”

For its part, Envision has submitted hundreds of pages of documents seeking a dismissal of the suit. Envision has shot down assertions that employees paid two different stock prices in the 2017 transaction.

“In their original pleading, plaintiffs advanced a primary case theory that the ESOP had overpaid for the shares it acquired at $1,770 per share, based on a contention that the ESOP purportedly purchased another block of shares in the same transaction for $1,404 per share,” Envision attorneys wrote. “Defendants later produced transaction documents demonstrating plaintiffs’ primary theory to be unequivocally false. Despite having those key documents, plaintiffs filed a first amended complaint that continues to advance a demonstrably false theory, along with other conclusory allegations of wrongdoing.”

Founded in 2000, Envision Radiology operates over 50 imaging centers, with locations in Colorado, Louisiana, Oklahoma and Texas, employing about 1,000 team members. 

Law360 first reported news of the class-action certification on Jan. 27.