By Dietrich Knauth

NEW YORK, March 3 (Reuters) - A U.S. bankruptcy judge in Texas on Monday approved a $75 million bankruptcy plan by an affiliate of prison healthcare company YesCare, after a compromise that allowed prisoners and their families to walk away from the deal and instead pursue lawsuits alleging that the company provided poor medical care.

U.S. Bankruptcy Judge Christopher Lopez approved the settlement, half of which will be used to pay prisoners’ personal injury and wrongful death claims, at a bankruptcy court hearing in Houston, saying that the case had seen a remarkable turnaround after a contentious start two years ago.

Lopez said that it was rare for a bankruptcy deal to allow "true" opt-outs for people who would prefer to pursue lawsuits without strings attached.

"Opting out really means opting out," Lopez said. "You're not forced into another system that then has more hurdles to jump through."

Eric Goodman, an attorney who negotiated the deal on behalf of people who sued the company, said that only 12 personal injury claimants chose to opt out of the deal. The majority preferred to take payment and get closure, and people who took the deal and chose to settle their claims against YesCare are still able to sue other defendants, such as government agencies that ran prisons, Goodman said.

YesCare is the successor to Corizon Health, which used a legal strategy known as the "Texas two-step" to split into two companies after being hit with about 200 lawsuits alleging that it provided substandard medical care that led to injuries and deaths at 50 detention facilities in 27 states. YesCare inherited Corizon's contracts and business assets, while a new shell company Tehum Care Services filed for bankruptcy after being saddled with responsibility for the lawsuits.

Tehum initially sought to use its bankruptcy to force its creditors, including personal injury claimants, into a deal that would have cut off lawsuits against YesCare and the companies’ private equity owners.

The bankruptcy was fiercely opposed by injury claimants, including prisoners, former prisoners, and family members of people who died after receiving medical care, and criticized by U.S. lawmakers who called it an abuse of the bankruptcy system.

But after Lopez rejected Tehum’s earlier settlement proposal, attorneys for tort claimants took the lead on negotiating a new deal. Tehum and YesCare eventually improved their offer by increasing the amount of money available to claimants and ensuring they could opt out of the deal if they preferred to litigate their claims in court. Prisoner healthcare claims would have been paid about $8 million under that deal, and they will receive at least $25 million under the current bankruptcy plan.

The settlement includes a $50 million cash payment from YesCare and its affiliates, as well as contingent benefits such as tax credits that raise the total settlement value to an estimated $75 million.

Tehum's other creditors, including its lenders and hospital systems that had sued Corizon over allegedly unpaid medical bills, also supported the deal.

The case hit a snag in November 2023 after its initial mediator, ex-bankruptcy judge David Jones, resigned from the bench over his undisclosed romantic relationship with an attorney involved in the Tehum negotiations.

The case is In re Tehum Care Services, U.S. Bankruptcy Court for the Southern District of Texas, No. 23-90086.

For Tehum: Jason Brookner of Gray Reed & McGraw

For the tort claimants committee: Eric Goodman, Cameron Moxley, David Molton, Gerard Cicero, and Susan Sieger-Grimm of Brown Rudnick

For the creditors' committee: Nicholas Zluticky and Zachary Hemenway of Stinson

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