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The Texas Two-Step's New Key

posted by Adam Levitin

In the wake of the Third Circuit's LTL Management decision many commentators wrote off the Texas Two-Step as dead. Turns out it's not, it's just playing out in a different key with a new filing in SDTX.

On Feb. 13, Tehum Care Services, Inc. filed for bankruptcy in the Southern District of Texas. The Tehum story starts with a Delaware corporation called Corizon Health, Inc., which provided prison health care services. Corizon faced substantial exposure (perhaps $88 million) on professional liability claims.

So on April 28, 2022, Corizon converted to being a Texas corporation. Five days later it merged with another Texas entity called Valitas Health Service, Inc. and two other Corizon entities.  Corizon Health, Inc., the surviving entity, then, on the same day, May 3, 2022, undertook a Texas divisional merger. The divisional merger resulted in two surviving entities:  Tehum and CHS.

Tehum, the BadCo, was allocated all of the expired and inactive contracts plus the tort liability arising from those contracts. Tehum also got $1 million cash plus rights to draw on a funding agreement from another entity called M2 LoanCo. The relationship between Tehum and M2 LoanCo isn't clear.

CHS, the GoodCo, received the other assets and also assumed liability for $100 million of senior secured debt obligations. Tehum also agreed to indemnify CHS for the assets and liabilities arising from the divisional merger.

Tehum filed for bankruptcy 286 days after its creation in the divisional merger.  Based on the indemnity of CHS, Tehum has now moved to extend the automatic stay to CHS (and also its indemnified officers and directors).

There's scant information at this point on Tehum, but three things jump out at me. First, it's not an asbestos case. That makes it like Aearo, rather than like the 1st generation of Texas Two-Steps.  Second, it's filed in the 5th Circuit, where there are no non-consensual non-debtor releases allowed. So, I don't see how CHS is going to avoid the tort liabilities. Third, it's not clear what unencumbered assets CHS has, but that might substantially shape negotiations. 

Here's the Motion to Enforce and Extend Automatic Stay.


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