“We’re not going forward today,” Judge Christopher Lopez told parties in the Tehum Care Services chapter 11 case today. Although a hearing for the court to consider conditional approval of Tehum Care’s disclosure statement
was slated for this afternoon, Judge Lopez made clear that he believes the DS currently lacks key information. He directed the parties to find another date for the hearing in “early November.”
The plan and DS, filed jointly by the debtor and its official committee of unsecured creditors, incorporates a deal between them and “settlement parties,” including Tehum’s nondebtor affiliates. “I don’t know how to assess this deal. I don’t know how anybody could,”
Judge Lopez remarked. “I think the fundamental deal has to be reconsidered in light of what I’m saying,”
The settlement embodied in the plan was the result
of global mediation
in the Texas two-step case. Judge David R. Jones, who recently resigned
as a bankruptcy judge in the Southern District of Texas, served as mediator. Judge Jones’ resignation followed allegations
that he improperly concealed his relationship with Houston bankruptcy attorney Elizabeth Freeman and a judicial misconduct complaint
filed by the chief judge for the U.S. Court of Appeals for the Fifth Circuit. Freeman appeared at the mediation as counsel for YesCare Corp., a NewCo entity allocated operating assets in the divisional merger that created Tehum Care.
In light of the revelations about Judge Jones’ personal relationship, the Office of the U.S. Trustee objected
to the plan and DS, arguing that questions needed to be answered about the propriety of the mediation and the plan settlement. Ha Nguyen from the UST reiterated the point today, saying that there is “no reason” for the court to hold an expedited hearing on the DS this afternoon after the “very unfortunate” events that led to Judge Jones’ resignation. This is especially true, he asserted, because many creditors are incarcerated individuals who likely received no notice of the most recent version of the DS.
Counsel for Tehum Care and the UCC disagreed. Debtor’s counsel Jason Brookner of Gray Reed insisted that “the mediation was not tainted in any way and those events do not and should not undermine our settlement. We have worked long and hard to get here.” The court should approve the DS on a conditional basis today and allow Tehum to begin soliciting votes on the plan, he argued, because “there were no issues with the process and our deal is a good deal.”
Similarly, Nicholas Zluticky of Stinson, the UCC’s counsel, said “so much has changed over the last two weeks, but I’m standing here on behalf of the committee because one thing has not changed: This settlement is the best way to maximize value for the estate and its creditors.”
However, the plan proponents faced pushback from creditors that objected to expedited approval of the DS. Brenda Funk of Munsch Hardt Kopf & Harr, special deputy attorneys general for the state of Idaho
, called for “more time to digest” the plan documents. Valrey Early, attorney for individual creditor Tracey Grissom
, said claimants like his client were “horribly treated by [Tehum predecessor Corizon Health] and its people and were actively disallowed” from participating in the mediation.
Early asserted that “to move forward on an expedited basis is just unjust,” especially after the debtor “turned what should have been a simple liquidating plan into a mess that cannot be understood by even people who have been doing this as long as I have.”
Ultimately, Judge Lopez agreed with the UST and the dissenting claimants that Tehum’s DS cannot be approved today, even on a conditional basis. The judge said he does not “question the integrity” of the professionals who have worked on the case, commenting that “these professionals before me have exercised nothing but the highest ethics.”
However, Judge Lopez found that the DS fails to provide adequate information to a “hypothetical creditor,” emphasizing that many of the “end user[s]” of the DS are incarcerated individuals. Due process requires that they be given more time to assess the document, he said.
Beyond the question of timing, Judge Lopez said, “the other issue is there are questions I've been asking since the beginning of the case and I still can’t answer them.”
He alluded to the relationship between the debtor and its nondebtor affiliates, commenting that “there are still questions about the parties involved and what they do and how this deal came to be and how much money has been transferred and whether the funding agreement was a good idea.”
Judge Lopez added, “It may be that this was the very best deal that could be cut. But there’s not adequate disclosure for me to feel comfortable that business judgment has been met.
And I think that’s been the gating problem from the beginning of this case.” Acknowledging that the debtor and UCC may view his comments as “harsh,” the judge reiterated, “I don’t know how people can make an informed decision” about the DS.
The court also suggested that the plan proponents may have to reconsider the “fundamental deal” embodied in the plan, even if it “changes the dynamics” in the case. Judge Lopez said that his decision “weighs on me, because I know people worked really hard. But I’ve got a job to do and I feel like I’m doing it.”
As discussed in the most recent installment of Reorg’s Court Opinion Review
, under the proposed settlement incorporated in the Tehum plan, the settlement parties (that is, Tehum’s nondebtor affiliates) would pay $37 million into a trust over a one-year period for the benefit of holders of personal injury claims and nonpersonal injury claims. Personal injury claims are tort and wrongful death claims “relating to allegations of medical malpractice, abuse, or neglect at facilities in which the Debtor served as a health care provider”; nonpersonal injury claims “are generally contract and trade claims based on the Debtor’s contractual duties owed to contract counterparties and/or the Debtor’s obligations owed to third parties.”
Under the plan, Class 5 personal injury claimants that do not opt out would share in 23% of the cash from an initial $25 million initial settlement payment after payment of administrative claims, 50% of future installment payments and insurance claims. Class 4 nonpersonal injury claimants that do not opt out would share in 77% of the initial payment and 50% of installment payments.
The plan would not impose a nonconsensual nondebtor release on creditors but encourages creditors to consent to a broad release of claims against insiders and related parties: the settlement parties, other Tehum affiliates, and their officers, directors and agents.
Holders of claims and interests may choose to opt out of these third-party releases whether they accept, reject or abstain from voting on the plan. However, only consenting creditors that agree to the third-party release would be entitled to distributions from the $37 million settlement payments, including the option to elect a $5,000 expedited distribution to be paid soon after the effective date.