Controversial Bankruptcy Trial Pits Troubled Prison Health-Care Provider Against Outraged Federal Officials and Civil Rights Groups

HOUSTON – A controversial legal maneuver in the bankruptcy trial of troubled prison health-care provider Tehum Care Services Inc. is drawing attention from federal officials and civil rights groups. The trial, set to begin Friday in the US Bankruptcy Court for the Southern District of Texas, will test the validity of a settlement proposed by Tehum that would strip prisoners and others of their right to sue parties involved in the takeover and bankruptcy of Corizon Health Inc., the nation’s former largest prison healthcare provider.

Tehum, a shell company established to absorb legal liabilities of Corizon, argues that its settlement offer of $55 million is a result of fair negotiations and will provide a “fair and equitable distribution.” However, a committee representing personal injury plaintiffs has filed a motion to dismiss Tehum’s Chapter 11 case, claiming that it is a “legal fiction” created for the benefit of the company’s owners. They argue that the proposed deal is designed to shield company insiders and settle alleged personal injury claims for significantly less than their worth.

The trial is expected to delve into the controversial corporate legal technique known as the “Texas Two-Step,” which has been utilized by corporate giants like Johnson & Johnson and Georgia Pacific LLC to halt and attempt to forcefully settle thousands of personal injury lawsuits. Marking an important addition to the evolving case law surrounding mass torts in bankruptcy, the outcome of the Tehum trial will provide insights into how bankruptcy courts interpret the transfers behind such maneuvers.

The US Trustee, the Justice Department’s bankruptcy monitoring arm, supports the dismissal of the settlement and the case, echoing concerns voiced by Senate Democrats and the American Civil Liberties Union over what they perceive as manipulation of the bankruptcy code and mistreatment of incarcerated creditors.

The Texas Two-Step, named after a Texas state law that allows companies to divide their assets and liabilities into new units and subsequently place the liability-laden unit into bankruptcy, has been a topic of debate among judges in bankruptcy and appellate courts. While some courts have ruled that the maneuver is permitted under federal law, others have required companies to demonstrate genuine financial distress to justify a bankruptcy filing.

Tehum’s bankruptcy filing in February 2023, following a transaction that transferred Corizon’s operating business into a new entity called YesCare Corp, led to the cancellation of hundreds of lawsuits alleging substandard medical care in prisons. The fallout from revelations of a romantic relationship between the Houston bankruptcy judge mediating the settlement talks and YesCare’s hired attorney resulted in the resignation of the judge and further legal actions affecting corporate bankruptcy cases.

Despite the controversy surrounding the proposed settlement, there are factions of creditors who support Tehum’s offer, believing it to be a better alternative than receiving nothing. However, other personal injury plaintiffs oppose the deal while acknowledging that bankruptcy offers their best chance at seeking recourse.

As the bankruptcy trial unfolds, the case raises important questions about the treatment of mass tort claimants in bankruptcy and the potential abuse of legal tactics to shield corporate insiders and undervalue injury claims. It remains to be seen how the court will interpret the Texas Two-Step and its implications for the rights of prisoners and other affected parties in future bankruptcy cases.