Corizon Executes “Texas Two-Step,” Spinning Off Debt Into Bankrupt New Firm to Avoid Paying Creditors and Lawsuit Winners
by Matt Clarke
Corizon Heath, Inc. has engaged in legal maneuvers over the course of the past year that are intended to limit how much it must pay on over $38 million in debt to companies that supplied it with staffing, medical supplies and real estate, as well as plaintiffs and attorneys who won lawsuits against the firm and government entities it had agreed to indemnify for lawsuit losses.
Corizon began the first step of the legal maneuvers known as the “Texas 2-step” in April 2022 when it converted to a Texas corporation. At the time, Corizon’s headquarters was in Tennessee, and it was not conducting any business in Texas. The sole reason it became a Texas corporation was to perform a “divisional merger,” a process permitted under Texas law in which a corporation divides into multiple successor corporations with assets and liabilities assigned to the successors as it sees fit under Tex. Bus. Orgs. Code, §§ 10.00l(a), 10.003.
In this case, Corizon survived and retained all of its expired contracts and their corresponding liabilities plus $1 million in cash, the right to collect on its insurance policies, and the right to collect up to $4 million under a “funding agreement” with a Corizon affiliate if certain conditions are met. The divisional merger also created a new corporation, CHS TX, which is owned by the same sole shareholder as Corizon, and which inherited all of Corizon’s employees (including its CEO and chair, Sara Tirshwell), along with its active contracts, equipment, real estate and remaining assets, including most of its cash.
After the divisional merger, CHS TX was acquired by YesCare, Inc., a corporation controlled by Tirshwell, and began doing business under that name. Tirshwell was replaced as YesCare’s CEO in February 2022. What was left of Corizon then changed its name to Tehum Care Services, Inc. and declared bankruptcy.
Tehum’s Chapter 11 bankruptcy filings show it has 200-999 creditors owed $10 million to $50 million in debt, for which the firm possesses just $1 million to $10 million in assets. Its listing of its 20 largest creditors shows over $37 million in debts, but two of the largest creditors on the list – hospitals in Boise, Idaho – have an “unknown” amount of debt. The list also does not include any of the multitude of lawsuits pending against Corizon or awards for lawsuits it already lost. Thus, Corizon’s true debt is undoubtedly much higher.
Its largest creditor with an amount listed is $12 million owed to Jefferson City, Missouri’s Capital City Hospital. Of the 11 creditors owed over $1 million each, five provided medical services and three provided medical staffing. The Arizona prison system is also listed as a creditor owed $2.6 million in indemnification. A later listing showed legal and indemnification claims against Corizon in 39 lawsuits from 11 states, eight of which were from vendors seeking payment and 20 of which involved indemnification of government entities or their employees. 31 of the lawsuits appear to be by prisoners or their survivors who allege Corizon provided unconstitutionally inadequate health care.
At this point, one must ask whether a corporation can get away with dumping its debts like this. The answer is maybe. It is possible to chase the successor corporation and have it added to a lawsuit, but you must know how to do so. Further, the bankruptcy automatically puts a stay on all litigation involving Corizon until the bankruptcy court lifts the stay.
In Kelly v. Corizon Health, Inc., USDC (E.D.Mich.), Case No. 2:22-cv-10589, Michigan prisoner William Kelly alleged that when Corizon was the contracted medical services provider at Michigan prisons, missteps by Corizon employees allowed his kidney cancer to grow and spread. While the lawsuit was pending, Corizon performed the “Texas 2-step.”
Kelly then sought to have Corizon’s successor organizations, CHS TX and YesCare, added to the lawsuit as defendants. The court initially had to decide whether federal, Michigan or Texas law would apply to the issue. It determined that it must apply Michigan’s choice-of-law rules because Michigan is the state in which the lawsuit was filed, citing O’Melveny & Meyers v. FDIC, 512 U.S. 79 (1994). It then determined that there was “little doubt a Michigan court would fall in line with the growing consensus that the law of the state of incorporation presumptively governs corporate law issues,” quoting Daystar Seller Fin., LLC v. Hundley, 931 N.W.2d 15 (2018).
But, because Michigan has a relatively strong interest in applying its own law and Texas, by comparison, has a relatively weak interest, the court would use Michigan law to determine whether Corizon transferred its interest in the matter to CHS TX and YesCare, pointing to Chrysler Corp. v. Ford Motor Co., 972 F.Supp. 1097 (E.D. Mich. 1997), Restatement (Second) of Conflict of Laws§ 302.
The court held that the divisional merger was to be treated like an asset purchase – basically a transfer of assets between corporations. “[W]hether the Court conceptualizes the divisional merger as an asset purchase or some distinct, restructuring process that is neither an asset purchase nor a true statutory merger, there is one well established doctrine in Michigan law that controls in either situation. That is the mere continuation doctrine. Under the mere continuation doctrine, a successor corporation will be treated as the same entity as a past corporation if the successor corporation is nothing more than ‘a reincarnation of the old’ corporation,” the court said, quoting Pearce v. Schneider, 21.7 N.W. 761 (1928).”
The court found that CHS TX was a mere continuation of Corizon because both had the same single shareholder: Valitas Intermediate Holdings. CHS TX also acquired all of Corizon’s active contracts and equipment and it “picked up right where Corizon left off,” the court noted. So it was added to the lawsuit as a defendant.
The court did not add YesCare as a defendant because Kelly’s attorney misunderstood the “alter ego liability” doctrine he was arguing and neglected to discuss YesCare’s relationship to CHS TX. This meant he waived the proper argument – that YesCare was a mere continuation of CHS TX.
As previously reported, the care Arizona prisoners received when Corizon had the contract to provide their medical and mental health care between 2012 and 2019 was abysmal. [See: PLN, Dec. 2022, p. l]. This led to numerous lawsuits which will now be affected by the “Texas 2-Step” and bankruptcy. Likewise, over $2.6 million in legal fees awarded to brilliant Berkeley, California attorney Lori Rifkin is now on hold due to the bankruptcy. [See: PLN, Mar. 2023, p. 56].
It is possible that, in cases where a state prison system or local jail is a losing defendant in a lawsuit alongside Corizon, the governmental entity may have to pay the entire award. That will almost certainly be the case where indemnification was promised. Corizon employees who were promised indemnification may also be on the hook to personally pay large awards.
Despite the financial turmoil, YesCare intended to implement a $1.06 billion contract to provide Alabama state prisoners’ heath care. However, in February 2022, the Alabama Legislative Contract Review Counsel put the contract on hold, citing both the financial issues and the fact that mere weeks before the awarding of the contract was announced, YesCare appointed to its board Bill Lunsford, an attorney that had represented the Alabama prison system in numerous lawsuits. This had led to a report of “undue influence.” Further, YesCare had not submitted the lowest bid, but was awarded the contract anyway.
Alabama state Rep. Chris England (D-Tuscaloosa) questioned whether YesCare could deliver on the contract. “The point has to be made that we know that this deal is going to fail,” said England. “We simply do not have enough money to pay to care for our aging prison population that our pardons and paroles board won’t release.”
What remains astonishing is that vendors are willing to do business with YesCare at all, considering that its successor corporation just stiffed vendors in Missouri, Idaho and Michigan for tens of millions of dollars. Further, YesCare is bleeding contracts, having lost 20 while only gaining five over the past few years. That is the same formula Corizon followed into bankruptcy – lose contracts, lose lawsuits, go broke.
All of these issues could be avoided if prisons and jails weren’t so anxious to contract out their constitutional obligation to provide prisoners medical and mental health care. They think they will be indemnified when something goes wrong, but the fate of Corizon may well show that they remain on the hook for huge court awards when their private vendors go belly up.
Such is the case in Arizona, where prison officials are scrambling to keep Corizon from weaseling out of its obligation to repay fines totaling more than $2 million imposed by a federal judge for substandard prison heath care. Good luck on collecting that! See: In re: Tehum Care Services, Inc., USBC (S.D. Tex.), Case No. 73-90086.
Additional sources: Alabama Political Reporter, Arizona Republic, KOB
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