U. S. bankruptcy judge approves bid by a Texas startup to buy HDL for $37.1 million

Calling it “an excellent result that satisfied a lot of constituencies,” U. S. Bankruptcy Judge Kevin R. Huennekens on Wednesday gave final court approval for the sale of most of the business assets of Health Diagnostic Laboratory Inc. (HDL) for $37.1 million to a Texas-based startup, True Health Diagnostics LLC. 

Representatives for the companies said they expect to complete the transaction by the end of the month.  Lawyers for HDL told the judge that the deal is structured so that the company will receive $27 million in cash at closing — which will be used to pay off secured creditors — along with a secured note for the remaining $10 million, which will be secured by receivables being transferred to True Health.

Doug Sbertoli, HDL’s general counsel and spokesman, said the sale of the company, which had filed for Chapter 11 bankruptcy protection in June, “will save hundreds of jobs” for HDL employees.

“We are proud of what we accomplished thus far in the bankruptcy process in the face of adversity.  It is a great day for science, technology and health-care providers and their patients across the country,” an ebullient Sbertoli said after Wednesday’s court hearing, which lasted just over an hour.

The judge’s decision seals the fate of HDL, which has remained uncertain since April.  That’s when the Richmond-based company agreed to a $47 million settlement with the U.S. Department of Justice over allegations that $20 process and handling fees paid to doctors referring patients to HDL for blood testing violated federal anti-kickback laws.  HDL did not admit to any wrongdoing, but the settlement helped plunge the company into bankruptcy.

Lawyers said during the court hearing that proceeds from the sale should be enough to pay off secured debtors. Yet there are many unsecured debtors as well, including the Department of Justice

Counsel for some of the unsecured creditors spoke during the hearing, saying their clients wanted the sales agreement to reserve their rights to dispute amounts that are owed.  For instance, Edwards Business Machines filed an objection with the court, saying it is owed $117,321, while HDL court documents were showing a balance of zero.

Huennekens said unpaid claims would attach to the sale proceeds. “This is a very normal kind of thing,” he said, noting that he was not going to hold up approving the sale over disputes over the amounts of claims.

Details are still being worked out over HDL’s majority ownership interest in its 283,000-square-foot downtown headquarters building in the Virginia Biotechnology Park. The building is not a part of the sale of the business assets, Sbertoli said.

Jason W. Harbour, a lawyer with Hunton & Williams LLP who represented HDL during Wednesday’s court proceeding, said that negotiations are underway with Biotech 8 LLC, a Richmond-based entity that owns HDL’s headquarters, over leasing space. Opened in April of 2014, the building is assessed at $63 million. At one point, nearly 900 people worked there. That number had fallen to 570 employees by mid-August.

True Health was named by HDL as the “stalking horse bidder” on Sept. 4, and it increased its initial bid of $32 million by $5.1 millionduring a Sept. 10 court-supervised auction. Harbour told the judge the auction was robust, drawing seven potential bidders who expressed preliminary interest. Of that number, two bids were considered: one from True Health and the other from a foreign firm that offered a higher price, according to sources.

True Health, a privately held company based in Frisco, Texas, that began operations about a year ago, emerged as the successful bidder. The sale was subject to today’s final approval by the bankruptcy judge.

True Health describes itself as innovative diagnostics company. Its model is similar to HDL’s, and it focuses on preventing chronic disease. The company specializes in advanced clinical laboratory testing, which it says enables health-care providers to more accurately diagnose, manage and prevent the progression of cardiovascular diseases, genetic disorders, diabetes and other metabolic conditions.

True Health CEO Chis Grottenthaler said in a statement,  “We are extremely pleased that the bankruptcy judge has approved the sale of HDL Inc. to True Health. The diagnostic technology developed by HDL Inc. is among the best in the business, and we look forward to utilizing it in combination with our existing technologies to offer innovative, state-of-the-art medical science to physicians and their patients.

Grottenthaler added that True Health is adopting “an exacting corporate compliance program that, along with rigorous controls and intensive sales force training, will ensure that True Health will meet and exceed all regulatory requirements.”

Tonya Mallory, HDL’s co-founder and former CEO,  who resigned in September 2014 after it became public that the company was under investigation by the Justice Department, told Virginia Business that she views the sale as a positive development.  “It’s a great thing for the staff and patients of HDL. True Health told me that they brought their company up to mimic what HDL was doing for patients. They’re passionate about continuing HDL’s model and mission and, finally, the talented team of employees will get some much needed leadership.” 

Mallory, along with some other defendants, is being sued individually by the U. S. government for her alleged role in what the Justice Department termed an $80 million kickback scheme. She owns 15 percent of the stock in HDL. Shareholders will not be paid anything for their holdings as part of the bankruptcy sale, Sbertoli said.