How Texas’s bankruptcy courts are used to shield a prison healthcare provider

When late last year the largest provider of healthcare to inmates in jails and prisons in the US found itself facing an avalanche of medical malpractice lawsuits, its path forward was seemingly obvious.

By filing for Chapter 11 bankruptcy in Texas’s increasingly popular bankruptcy courts, Wellpath Holdings could restructure itself, in the process staying the 1,500 lawsuits it had been facing and limiting its exposure to more than $100m in potential liabilities.

Last month, a bankruptcy judge for the southern district of Texas in Houston extended those stays to give Wellpath additional time to propose how it might exit bankruptcy and continue operating.

But critics say that the move is a cynical attempt to avoid paying out to the families of people devastated by the company’s actions in a state increasingly seen as a safe haven for big corporations looking to avoid paying out to people and families their actions have harmed.

Among the cases stayed for Wellpath was one brought by Teesha Graham of Albuquerque. Her father Frankie died in 2022 after spending almost a week slumped in his San Juan county jail cell, covered in vomit and excrement as medical staff and prison guards refused his requests for help, an inmate in the jail told the Guardian.

Also stayed was a claim brought by Nicole Poppell of Colorado Springs. Her daughter Savannah died aged 24 just three days after she was booked into El Paso county jail in Colorado. Incessant vomiting caused by opiate withdrawal tore her esophagus and she bled to death in her cell.

“Now they’re filing bankruptcy the chances are I could get next to nothing but really I don’t even give a shit about the money,” said Nicole. “I just want to be heard.”

Poppell and Graham are just two grieving family members wanting the bankruptcy court to consider their claims against Wellpath because as “unsecured creditors”, but they’re at the bottom of the hierarchy when it comes to who gets paid from the limited funds that remain.

Last week they enjoyed a small victory as Wellpath dropped its request that the court approve some $5m in bonuses for 12 of its executives. “I’ll never understand it,” said Graham.

Attorneys representing claimants against Wellpath say its bankruptcy was a long time coming, and part of a cynical strategy that would see it minimize costs low with reduced staff and improper insurance coverage. Malpractice lawsuits would inevitably accumulate but using the Texas courts it could largely shed itself of those liabilities and exit from it all relatively unscathed.

“These companies keep their costs as low as possible and then rely on the bankruptcy courts in Houston to bail them out once they hit a critical mass of lawsuits,” said Adam Flores, a New Mexico attorney representing Graham.

Wellpath is a for-profit business headquartered in Nashville, Tennessee, and owned by private equity firm HIG Capital. It operates in jails and prisons across almost 40 states and is responsible for the care of hundreds of thousands of inmates.

Although bankruptcy is governed by federal code, jurisdictions will enforce it with varying lenience, and typically if a company has enough assets in a given state they can make use its courts.

In recent years, the southern district of Texas has become a go-to bankruptcy venue, displacing the southern district of New York as the second most popular in the country behind Delaware.

“The Southern District of Texas really blew up four or five years ago,” said RJ Shannon, a bankruptcy attorney in Houston who is representing almost 100 claimants in the Wellpath case. “It’s a debtor-friendly court, so it’s where all the big cases will be filed.”

Last year, the southern district of Texas saw some 31 filings for bankruptcy by companies with assets greater than $100m, whereas the southern district of New York saw just 11, according to figures from Bankruptcy Data.

Wellpath’s filing in November made it the second prison contractor to have used the court’s Houston division in just two years after prison healthcare firm Corizon filed for Chapter 11 in early 2023. The maneuver it attempted has been referred to as “the Texas Two-Step” and sees a company split itself into two, placing valuable assets in one and its liabilities in the other.

Although Wellpath is pursuing a simpler and more traditional Chapter 11 restructuring, its critics say the move is intended to have precisely the same effect.

“I think the reason Wellpath filed here [in Texas] is that they saw Corizon do it and they saw good things came of it,” said Shannon. He said that not only is the Houston court friendly to debtors, it’s also “user-friendly”, meaning proceedings can take place fast.

Anna Holland Edwards, a civil rights attorney in Denver who has brought a handful of cases against Wellpath over her career, said she saw its bankruptcy coming from a mile away. In early November her office asked a state court to issue sanctions on the company ahead of its expected bankruptcy.

Holland Edwards and other critics of Wellpath paint its use of Chapter 11 as a “business model” – both inevitable and symptomatic of the increasing extent to which America’s corporate assets have come under the ownership of private equity funds.

They argue that Wellpath, under private equity ownership, borrowed money to buy up regional facilities across the country and then underbid rivals and county services in order to win taxpayer-funded government contracts. Underbidding meant cost-cutting.

“If they don’t have enough money, maybe instead of having 10 nurses working in jail they’d only get five,” said Shannon.

According to Graham, it was a lack of staff in San Juan county jail that led to her father’s death: “They feel like they can send two people in there to care for over 500 humans?”

Another cost-cutting measure that may have brought Wellpath to its knees was its purchase of liability insurance policies that appeared to meet state and local government requirements but failed to establish any “true risk transfer”. As revealed in the ongoing bankruptcy proceedings, these policies only pay out if Wellpath covers a share of the damages, otherwise, no insurance kicks in.

And so tight were Wellpath’s purse strings that at the time of its bankruptcy it had left around 15 EMS providers in Michigan with more than $6m worth of unpaid bills, according to the Michigan Association of Ambulance Services.

Where the chips will now land remains uncertain, according to Shannon. As it stands, the ball is in Wellpath’s court, as prepares to issue a revised plan for how it will restructure and emerge out of Chapter 11 operational.

A recent ruling by bankruptcy Judge Alfredo R Perez of the southern district of Texas extended the stay on the pending lawsuits until at least 30 April.

In the meantime, unsecured creditors will fight to have as much money as possible set aside for their settlements. In many cases, especially those involving personal injury, once the stays are lifted plaintiffs’ right to seek damages will be restored, but the pool of funds from which to collect will be limited.

For Wellpath, the plan after Chapter 11 is to continue business as usual, and with Trump in office, there has never been a better climate in which for it to emerge from bankruptcy, according to Andy McNulty, another civil rights attorney based in Colorado.

“We saw when Donald Trump was elected that private prison company stocks soared to all-time highs so there’s no reason to believe that if Wellpath is allowed to continue operating it will not continue to profit off the suffering of inmates across the country,” he said.

A spokesperson for Wellpath said in a statement to the Guardian that it had filed for Chapter 11 in order to “strengthen our financial foundation without compromising our ability to deliver high-quality patient care”.

“We remain committed to providing vital healthcare services to underserved populations and are confident this process will allow us to continue to do so for years to come,” they added.

The company declined to say why it chose to file in the southern district of Texas or to answer questions about its liability insurance.

Savannah’s mother Nicole said she wants to see Wellpath dissolved for good. “For three days she was in there and she was begging for help, she was crying for help, and she was alone,” she said. “I want these people shut down.”