The dismantled remains of one of Richmond’s most charitable companies has started demanding the return of some of its gifts.
While the now-bankrupt blood-testing firm Health Diagnostic Laboratory enjoyed years from 2008 through 2015 as one of Richmond’s fastest-growing companies, it simultaneously earned a reputation for philanthropy.
Millions for the Science Museum of Virginia. A multimillion-dollar agreement to sponsor Virginia Commonwealth University’s athletics program. Numerous other smaller gifts.
But HDL’s swift downfall and 2015 bankruptcy on the heels of a federal investigation into whether it paid doctors illegal kickbacks for using its service has left many of those gifts in jeopardy as the company’s bankruptcy trustee attempts to recoup more than $600 million for its creditors.
Co-founder and former CEO Tonya Mallory was well-known for her charitable tendencies. In 2011, HDL gave $2.35 million to the Science Museum of Virginia, at the time the largest corporate gift the museum had received.
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The company also provided numerous scholarships to students at VCU — Mallory’s alma mater — and in 2012 promised $4 million to become a sponsor of VCU Athletics.
Mallory frequently was personally involved in the media attention around the donations and sponsorships, joining then-VCU men’s basketball coach Shaka Smart on the court for a photo opportunity.
She also once participated in a car race against former Washington Redskins wide receiver Gary Clark during the intermission of an arena racing event at the Richmond Coliseum, for which HDL was the sponsor. (Mallory won by a large margin, according to a report on the event.)
In addition to the large gifts, HDL gave smaller contributions throughout the community — from sponsoring a viewing of a health-focused documentary to donating to area private schools, including St. Michael’s Episcopal School.
In a complaint that Richard Arrowsmith, HDL’s liquidating trustee, filed in September against Mallory and dozens of other former HDL executives and employees, he claims that HDL “squandered millions of dollars through inappropriate corporate sponsorship and large charitable gifts.”
“These and other wasteful donations and sponsorships ... intended to raise Mallory’s personal profile in the Richmond-area community at HDL’s expense, cost HDL and its creditors more than $3.1 million,” Arrowsmith’s complaint states.
The trustee’s legal counsel has sent demand letters to various area organizations, including VCU, in which it calls the donations “fraudulent transfers.”
A pair of letters sent to VCU offer the school settlements in which it would repay 90 percent of the donations. One of the payments was $125,030 to Massey Cancer Center, and the second was $20,000 to VCU’s School of Allied Health Professions.
The demand letters do not state when HDL made the two donations. A VCU spokesman declined to comment because the matter currently is under legal review.
It is not clear what other area organizations received similar demand letters. The local chapter of the American Heart Association did not receive a demand letter, and the American Diabetes Association declined to comment.
Representatives with neither the Science Museum of Virginia nor St. Michael’s Episcopal School returned requests for comment.
As part of its VCU Athletics deal, HDL agreed to pay $400,000 a year until 2020, but after paying $800,000 to the school, HDL backed out of its sponsorship after its bankruptcy in 2015.
Arrowsmith does not appear to have sent a demand letter to VCU for a return of the $800,000.
Bill Gray, an attorney with Richmond-based Sands Anderson, said Arrowsmith’s ability to recoup charitable contributions depends on the nature of the donations and may be dictated by any contracts signed between HDL and the recipient.
“As the liquidating trustee, Mr. Arrowsmith has a duty to ensure recoveries are as robust as possible,” said Cullen Speckhart, an attorney with the law firm Wolcott Rivers Gates, who represents Arrowsmith.
Since HDL entered Chapter 11 bankruptcy in June 2015, Arrowsmith has been attempting to recover transfers for the company’s creditors. He has filed various complaints against dozens of vendors HDL paid before its bankruptcy.
“We have sent thousands of letters to entities, including charitable organizations, demanding all manner of avoidable transfers that we as a fiduciary are charged to collect under the (bankruptcy) code,” Speckhart said.
Court documents indicate that Arrowsmith’s biggest push to return money to HDL’s bankruptcy estate is the lawsuit he has filed against more than 100 defendants, including Mallory and other former executives.
The suit does not cite a specific monetary amount to be paid the estate but says the actions of HDL’s former executives caused the creditors more than $600 million in damages.
According to Arrowsmith’s Dec. 31 quarterly report, the bankruptcy estate has about $800 million in administrative claims, which refers to debt incurred after the bankruptcy filing.
Administrative claims are paid before pre-bankruptcy claims, which would include claims from creditors such as the U.S. Department of Justice, with which HDL agreed to a $47 million settlement to end its part in a federal investigation.
Speckhart declined to say how many charitable contributions Arrowsmith is recovering, nor how much money those contributions would represent for HDL’s creditors.
Steven D. Walt, a professor with the University of Virginia School of Law, said demanding the return of donations is a fairly new trend within bankruptcy law and has grown in popularity in the past 10 years.
He said trustees have been encouraged by developments outside of corporate bankruptcy. Increasingly, trustees representing bankrupt individuals have argued that payments the debtor made to cover their child’s college tuition should be considered fraudulent transfers.
Those payments, trustees have argued, should be returned to the bankruptcy estate, and the same line of thinking has been applied to corporate bankruptcies.
“The argument is that the giving corporation received nothing of benefit, or not an equivalent benefit of what it made (to the recipient),” Walt said.
“Outside of bankruptcy, charity’s nice, it’s a good thing. But in bankruptcy things change a little. There’s a saying: Justice before charity. What that means is in bankruptcy, charity’s nice and it’s valuable, but justice — which is paying creditors — is more important.”
Gray, the Sands Anderson attorney, sent out a legal alert earlier this month offering consultations to organizations that received demand letters from HDL’s trustee.
“I certainly do hope that any nonprofit doesn’t just automatically think they have to write a check for the full amount demanded here because the liquidating trustee has evidentiary burdens,” Gray said.
“This claim by the liquidating trustee is predicated on the fact that HDL didn’t receive anything from the payment it made, and it could have received a lot of things — the good will of the community.
“They were known for this, and I don’t think that they made these donations not expecting they would somehow benefit from it.”