Federal judge hits the brakes on Corizon bankruptcy deal

• A Texas judge has slowed down a bankruptcy deal involving Tehum, formerly Corizon, a leading prison health provider.
• An attorney for the US Trustee's Office appeared in court to raise questions about the mediator, Judge David Jones, and his romantic relationship with a lawyer involved in the talks.
• The judge on the case, Christopher Lopez, raised other concerns, saying "the fundamental deal has to be reconsidered."

A $37 million settlement in the bankruptcy of a prison health care company accused of responsibility in prisoner deaths is now in doubt. A federal judge has declined to consider expedited approval of the plan's disclosures, saying far too many questions remained unanswered.

"We're not going forward today," Judge Christopher Lopez said at a hearing on Tuesday in the Southern District of Texas bankruptcy court in Houston. "There's not enough time. People are entitled to the time."

The bankrupt company, Tehum, formerly known as Corizon Health, was once the nation's leading prison health provider. As lawsuits mounted against Corizon over claims of negligent care and prisoner deaths on its watch, the company pulled a controversial maneuver, the Texas Two-Step, that involved splitting the company in two. One company, YesCare, got the active prison contracts; the other, Tehum, got saddled with most of Corizon's debt and went into bankruptcy.

The case has drawn national attention after revelations that the judge serving as mediator was in a secret romantic relationship with an attorney representing YesCare. Corizon's Two-Step has also been sharply criticized by lawmakers, including Sen. Elizabeth Warren, who has promised Congressional oversight. Attorneys representing plaintiffs in the malpractice suits against Corizon said the deal would effectively allow investors to walk away with valuable assets while leaving the prisoners and their families with table scraps.

At Tuesday's hearing, Lopez said creditors deserve more information about the parties involved in the bankruptcy and more time to review the proposed deal before it's sent out for a vote.

"There are still parties involved — and how they're connected, and what they do, and how this deal came to be, and how much money has been transferred, and whether the funding agreement was right," Lopez said. "There is a bunch of information that I've been asking for from the beginning of the case, well before we ever got to mediation, and those questions have yet to be answered."

Lopez later added, "I think the fundamental deal has to be reconsidered in light of what I'm saying."

Jason S. Brookner, an attorney for Tehum, downplayed Lopez's remarks, saying by email, "He said he wasn't hearing us yesterday and we should find another date and re-set it."

Many of the creditors, Lopez noted, are people without timely access to mail — a clear reference to the incarcerated plaintiffs. Lopez's decision comes weeks after Insider first raised questions about the fairness of the settlement, reporting that it would offer current and former prisoners a few cents on the dollar. The settlement deal would resolve hundreds of the malpractice suits for just $5,000 each — even those from families suing on behalf of loved ones who they say died due to Corizon's neglect.

During the hearing, Lopez obliquely referenced the sudden resignation of the bankruptcy court's chief justice, David Jones, on Sunday, saying, "A lot has come out" about the mediation process that led to the deal. Insider was the first to report allegations that Jones, who oversaw those talks, was involved in a previously undisclosed romantic relationship with a prominent bankruptcy attorney, Elizabeth Freeman, his former clerk.

Freeman represented YesCare in the negotiations.

"I have no visibility into the mediation," Ha Nguyen, an attorney with the Houston office of the US Trustee, said at the hearing. "But what we do know is that there was a lawyer involved with the mediator that was in the room. That fact is concerning to people."

The Office of the US Trustee, an arm of the Justice Department, took the rare step of filing a 16-page objection to the settlement on Friday. The objection not only raised the conflicts surrounding Jones' mediation of the talks, but the unique disclosure needs of incarcerated plaintiffs.

"The circumstances of this case, with a vulnerable population of creditors that face obstacles to participation even on regular notice, weigh in favor of requiring more time," the objection reads. "Moreover, recent admissions by the judicial mediator may raise issues about the propriety of the mediation that serves as the basis for the global settlement — and thus about the very propriety of the settlement and plan itself."

The Trustee's objection also raised concerns about the release from liability of multiple parties whose exact relationship to the entities involved in the Two-Step was not laid out in the disclosure statement.

The proposed global settlement would protect Tehum, YesCare, and many of their current or former executives and directors from any future lawsuits related to Corizon's care. If creditors approve it, more than 350 lawsuits alleging medical negligence over Corizon's care at jails and prisons nationwide would be abruptly resolved. So would dozens of employment-lawsuits over allegations including discrimination, wage theft, and wrongful termination, along with claims regarding millions of dollars in unpaid invoices from hospitals and other health care providers.

Lopez said if his outstanding questions remain unanswered in the disclosure documents, he won't approve the disclosure package, or potentially even the underlying plan.

"There's not enough information here for me to feel comfortable that this disclosure statement — and maybe those parties don't want any more information disclosed — but that may mean other hard decisions get made," Lopez said. "Sometimes the outcome is harsh, but that's where we are."

The son of Hector Garcia, who died in August 2019 at the age of 55 after receiving shoddy medical care from Corizon at a jail in New Mexico, according to his family's suit, told Insider that he's thrilled by the judge's decision not to immediately approve the disclosure documents.

Hector Garcia Jr., who dialed in to the hearing, said he was blown away by the judge's words. "It's like a complete 360 turnaround," he said. "I'm so happy that our voice is being heard now."