The bankruptcy trial of a distressed prison health-care provider, Tehum Care Services Inc., is set to evaluate a contentious corporate legal mechanism often deployed to resolve mass tort liabilities. This method – known in legal circles as the “Texas Two-Step” – has attracted criticism from multiple quarters, including federal officials and civil rights groups.
Tehum Care Services, a shell entity created to shoulder the legal liabilities and medical malpractice claims of former prison healthcare provider Corizon Health Inc., is seeking the court’s endorsement for a settlement. If approved, the agreement would rescind the rights of prisoners and others to bring lawsuits against the parties that assumed control of Corizon and masterminded its bankruptcy filing.
In contrast, a committee symbolizing personal injury plaintiffs has taken steps to dismiss Tehum’s Chapter 11 case. The group decries Tehum as an artificial legal entity, spawned solely to perpetrate a glaring fraud that would benefit the company’s owners.
Starting this Friday in the US Bankruptcy Court for the Southern District of Texas, the trial’s outcome could represent a noteworthy addition to the evolving case law concerning mass tort claimants in bankruptcy. The complex trial is expected to spotlight the Texas Two-Step – a controversial technique involving asset and liability division and subsequent bankruptcy filing, followed by an enforced global settlement.
While the settlement proposal under criticism is reportedly designed to shield company insiders and resolve about $775 million of alleged personal injury claims for a small fraction of the sum, Tehum maintains that their $55 million settlement proposal has been fairly negotiated.
The Justice Department’s bankruptcy watchdog, the US Trustee, supports calls for negation of the settlement offer and the case’s dismissal. Notably, the case has also sparked concern beyond routine bankruptcy oversight bodies, with Senate Democrats, headed by Elizabeth Warren (Mass.), and organizations like the American Civil Liberties Union echoing the objections publicly.
Such divisive maneuvers within the corporate landscape and their impacts form an intriguing discussion, further amplified by the ruling on Tehum’s case, which could provide a significant datapoint for the viability of these types of proceedings.
The full story can be found on the Bloomberg Law website here.