DOJ says prison health company's bankruptcy should be dismissed

The U.S. Department of Justice's bankruptcy watchdog on Friday asked a judge to dismiss the bankruptcy of a prison healthcare contractor, saying that the company appeared unable to reach a viable settlement of prisoners' lawsuits accusing it of providing substandard care at detention facilities nationwide.

The DOJ's office of the U.S. Trustee said that Tehum Care, a subsidiary of prison health provider Corizon, now known as YesCare, should not remain in bankruptcy if it insists on pursuing a "coercive" and legally flawed settlement that would eliminate prisoners' lawsuits against Corizon and its owners.

The company's proposed bankruptcy deal is not a true settlement, because it could end prisoners' lawsuits against their wishes, U.S. Trustee Kevin Epstein wrote in a filing in Houston, Texas, bankruptcy court.

"Considering that after a year of spending considerable resources in this Chapter 11 case, the debtor is still unable to propose a confirmable plan, the U.S. Trustee supports dismissal," Epstein wrote.

Tehum and YesCare have been criticized by prisoners, their families and U.S. lawmakers for pursuing a strategy known as the "Texas two-step," which involves placing a shell company into bankruptcy to stop lawsuits against a better-funded parent company.

The companies' predecessor, Corizon Health, used a Texas statute to split itself into two companies, YesCare and Tehum, shortly before the bankruptcy was filed in February 2023. YesCare inherited Corizon's assets and its go-forward business, while Tehum was stuck with the liability from about 200 lawsuits accusing Corizon of providing prisoners with substandard medical care that led to injury and death at 50 detention facilities in 27 U.S. states.

Other large companies like Johnson & Johnson and Georgia-Pacific have also employed the "Texas two-step," attempting to use a shell company's bankruptcy to stop lawsuits, with mixed results. A J&J affiliate was dismissed from bankruptcy twice, while a Georgia-Pacific company remains in bankruptcy.

The two-step strategy has generated opposition among U.S. lawmakers, including Sen. Elizabeth Warren, who praised the DOJ's position in the Tehum case.

"Corizon does not belong in a bankruptcy court and its owners must stop hiding from victims and face the consequences of their actions," Warren said Friday.

Tehum has sought to use its bankruptcy to finalize a settlement that would allocate roughly $8.5 million to settle prisoners' claims.

A committee representing prisoners and their family members asked U.S. bankruptcy judge Christopher Lopez in January to dismiss the case and allow them to resume their lawsuits in other courts, saying that the bankruptcy was a fraud from the start. Tehum's only goal in bankruptcy is to stop lawsuits against Corizon, its owners and key employees, the committee said.

Lopez will hear arguments on the committee's motion to dismiss in March.

Tehum has argued that its proposed bankruptcy settlement has already maximized the amount that can be collected from the company owners and insiders, who are providing $55 million in value, which will be used to pay the company's other creditors in addition to the prisoner healthcare plaintiffs.

If the case is dismissed, creditors would be forced into a "race to the courthouse," where only the most aggressive and well-represented claimants will recover anything of value, Tehum argued in a Friday response to the committee's motion to dismiss.

An attorney for Tehum declined to comment beyond what the company filed in court.

Regional hospitals that are also creditors in Tehum's bankruptcy weighed in Friday as well, supporting the proposed settlement. St. Luke's Health System in Idaho, for example, said that the settlement was its best chance to recover money from Corizon's alleged $30 million underpayment for medical services provided by St. Luke's staff.

The case is In re Tehum Care Services, U.S. Bankruptcy Court for the Southern District of Texas, No. 23-90086.

For the tort claimants committee: Eric Goodman, David Molton, Gerard Cicero, and Susan Sieger-Grimm of Brown Rudnick

For Tehum: Jason Brookner of Gray Reed & McGraw

For the U.S. Trustee: Ha Nguyen of the DOJ's Office of the U.S. Trustee

For the creditors' committee: Nicholas Zluticky of Stinson

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