Corizon Unit’s Bankruptcy Alters a Key Element of Texas Two-Step

Prison health-care company Tehum Care Services Inc. won approval to exit bankruptcy with a personal injury settlement that partly shed the controversial legal strategy it intended to pursue two years ago.

The company’s reorganization plan allowed tort claimants, including prisoners, to opt out of a $75 million settlement and instead seek larger payouts in state court for poor medical service they say they received in prison.

That means hundreds of personal injury and wrongful death claimants were given the option to preserve their right to sue Tehum’s private equity-backed parent Corizon Health Inc. and affiliate YesCare Corp. for successor liability—a key difference from the traditional format of the Texas Two-Step maneuver.

“Most debtors and related parties, like the co-defendants or insurers, would never agreed to such limitations because the whole point of the settlement is to get peace and finality,” Emory University bankruptcy professor Lindsey Simon said. “Here, they are basically accepting that complete peace and finality may not happen.”

Successor Liability

Tehum’s bankruptcy attorneys called it the “first ever confirmed chapter 11 plan in a ‘Texas Two Step’ divisional merger case” in a March 5 press release following the plan’s approval in the US Bankruptcy Court for the Southern District of Texas.

But legal professionals said it didn’t quite fit the mold of a Texas Two-Step, which aims to shield parent entities from mass liabilities by spinning them off into a new subsidiary.

Claimants were given the option to remove themselves from the settlement when they voted on the plan last year.

Despite the fact that most tort claimants didn’t opt out of the deal—choosing instead to accept the settlement payout and drop their claims—the opt-out feature alone makes Tehum’s case different from other Two-Step bankruptcies.

Those include Georgia-Pacific’s Bestwall LLC and Johnson & Johnson’s Red River Talc LLC, which are unlikely to leave successor liability open-ended like Tehum did.

Tehum essentially took the fight over successor liability off the table and didn’t require creditors to go through bankruptcy trusts to litigate if they opted out, Simon said.

With the option for creditors to retain rights to sue, the argument over the propriety of a Two-Step—which has been criticized by lawmakers and tort claimant advocates—essentially disappeared in Tehum’s case. A tort claimants’ committee, which previously wanted the bankruptcy thrown out entirely, backed the settlement.

Corizon separated Tehum, which held the company’s tort liabilities, from YesCare, which continued to operate and handle health-care contracts, in 2022.

Getting a significant percentage of claimants to agree to the settlement, while providing the opt-out feature, is still a win for Tehum, Simon said. The deal provides those creditors $25 million of the total pot.

Tehum attorney Jason Brookner, a partner at Gray Reed, said in the press release that the case presented “extraordinary challenges” from the beginning but that the court’s approval of the plan “validates our approach and provides a path forward for all stakeholders.”

Tort Claims Allocation

Tehum set up a tiered matrix to allocate certain estimated funds for more than 200 tort claims, which includes values from $1.2 million to $1.6 million for wrongful death claimants, court records showed.

David Hall, a tier two claimant, is likely receive around $385,000 under the settlement for his severe injury claim, his attorney Yoseph Orshan of Orshan Legal Group LLC said. Hall was classified under tier two because of partial paralysis in his wrist, Orshan said.

Hall sustained the injury while he was incarcerated in a Maryland prison run by Tehum medical staff. He won a $770,000 judgment from a Maryland state court against Tehum but is happy with the possibility of a mid-range distribution, Orshan said.

“This is more than their $250k take it or leave it offer,” he said in an email.

The plan included two settlement trusts: one for personal injury and wrongful death claims and another for non-tort general unsecured claims. Both groups had to consent to release YesCare, Corizon, and other related nonbankrupt entities in order to receive compensation.

Tehum’s plan approval shows “that even when a company attempts to resolve personal injury claims in a bankruptcy, if that company is not distressed, it must permit objecting claimants to opt-out and pursue the uncapped state law damages they are entitled to,” Clay Thompson, a mesothelioma trial lawyer at Maune Raichle Hartley French & Mudd, said in an email.

Two-Step Differences

Companies facing litigation alleging their asbestos-based products caused cancer—including J&J—have been the main users of the Two-Step, though none have successfully completed the process yet. Since their goal is still to protect the nonbankrupt parent entities, Tehum’s plan won’t be a useful guide, legal experts said.

What they actually want is to “avoid the civil jury system,” Thompson said.

The allocation issues and payout systems would also be different in other mass tort and Two-Step cases due to the nature of the businesses, Simon said.

Some of the cases, like J&J’s Red River Talc, are strictly “litigation bankruptcies” seeking settlements, but the companies don’t actually need to reorganize, she added.

J&J is in the litigation bankruptcy category, as there are potentially hundreds of thousands of people, both now and in the future, who may try to bring cancer claims against it and its spinoffs, she said.

“There’s a vast business difference between a relatively distressed prison health-care company and Johnson & Johnson,” Simon said.