Wellpath’s Chapter 11 Deep Dive

Welcome to the 170th Pari Passu Newsletter. 

A few weeks ago, we explored the case of Corizon Health / Tehum Care Services, a major correctional healthcare provider that utilized a Texas Two-Step to manage its mass tort liabilities. Today, we turn to another company in the correctional healthcare sector that faced a similar downfall: Wellpath. 

Once one of the largest correctional healthcare providers in the United States, Wellpath served more than 200,000 patients in correctional facilities. Yet, underneath its scale and rapid growth was an accumulation of care deficiencies, chronic understaffing, and an increasing number of litigations over patient deaths. These pressures, combined with rising debt and insufficient liquidity, ultimately resulted in its downfall.

Note: the Tuesday editions, like this one, are available to everyone. If you are looking to access our full premium research (see the full archive here), you can do so here.

Wellpath is one of the largest providers of medical and mental health services for incarcerated individuals in the United States, operating across prisons, civil commitment centers, and forensic treatment facilities. The company partners with federal, state, and local governments to deliver these healthcare programs within correctional settings. Its operations are divided into two primary segments: 

Recovery Solutions (RS): the company’s behavioral health division, focused on addressing mental and behavioral health needs such as depression, anxiety, and substance use disorders. It operates treatment programs that support the recovery and rehabilitation of patients across correctional facilities. 

Corrections Health: this segment is composed of the State and Federal (SF) division and the Local Government (LG) division. The SF division provides chronic care and long-term disease management for incarcerated individuals with more persistent conditions such as diabetes, hypertension, and heart disease. The LG division delivers a full suite of medical service systems to patients in local jails and juvenile detention centers, focusing on short-term stabilization, timely intervention, and continuity of care for detainees on shorter timelines.

While the exact partnerships that Wellpath maintains are not publicly disclosed, a few major ones demonstrate the scale of their operations. One example is the Arkansas Board’s $150mm per year medical contract with Wellpath, which engaged them to provide healthcare services to all inmates under the Arkansas Division of Correction and the Division of Community Correction, covering roughly 21,000 inmates [2]. Another is Wellpath’s contract with the Massachusetts Department of Correction, producing $119mm of revenue annually and serving all inmates under the Massachusetts incarceration system [3]. In total, Wellpath is estimated to provide care for about 300,000 incarcerated people in the United States, which represents roughly 15% of the two million national incarcerated people [1]. 

Since the company has never been public, financial information is limited. However, for the trailing twelve months ending June 30th, 2024, which was the most recent revenue disclosure from the company, we know Wellpath generated $2.4bn in revenue [5]. While EBITDA has never been disclosed by Wellpath, Corizon Health, as a close peer, reported a profit margin of 24% in 2013 (the most recent accessible profit margin data), whereas Wellpath has cited “very thin EBITDA margins” in recent years of operations, reflecting a stark difference in profitability [6]. Wellpath employs more than 13,000 people and operates across roughly 420 facilities in 39 states. It is headquartered in Nashville, Tennessee. 

Wellpath was formed in 2018 when H.I.G. Capital acquired Correct Care Solutions (CCS, founded in 2003) and merged it with its existing portfolio company, Correctional Medical Group (CMG, founded in 1983). H.I.G. had owned the Correctional Medical Group, a correctional healthcare provider across medical and dental health, since 2013. During its ownership, CMG pursued a series of acquisitions to expand its geographic presence, creating new regional divisions such as the Southeast, Midwest, Northwest, and Southwest Correctional Medical Groups. In 2018, H.I.G. acquired CCS from its previous owners, Audax Group, Frazier Healthcare Partners, and GTCR, and merged it with Correctional Medical Group due to their overlapping service offerings. 

While the exact value of the purchase was not disclosed, we can do some napkin math to estimate the deal value. H.I.G. raised a $610mm loan as debt for this transaction and the post merger leverage was projected to be 10.6x EBITDA [7]. Assuming that the loan was the only debt raised for this transaction (since post-transaction leverage is already high at 10.6x), and that the LTV was 60% for this transaction (typical for private equity buyouts), the TEV would come down to ~$1bn. At a 10.6x EBITDA multiple, EBITDA would be around $58mm, so the EBITDA multiple paid would be approximately 18x. This resulted in an aggressively levered capital structure through the transaction. However, beyond this disclosure, there is very limited information on Wellpath’s subsequent debt raises and capital structure. 

Broadly speaking, the prison services sector has historically attracted strong private equity interest due to its fragmented nature, which creates cost-cutting opportunities through consolidation. Additionally, the long-term structure of government contracts provides a recurring revenue base that is attractive to private equity’s model. H.I.G. Capital itself has made many investments across prisons and correctional services, such as TKC Holdings, a major provider of commissary services to prisons, as well as CCS and CMG, as mentioned above [8].

The correctional healthcare industry in the United States has historically evolved in response to shifts in criminal justice ideology, rather than trends within the broader healthcare sector. In the 1970s, the rise of the “tough on crime” movement, which was a response to increasing crime rates and a backlash against a rehabilitation-focused justice system, led to harsher sentencing policies and longer periods of incarceration. This initiated the beginning of a mass incarceration era, which shifted the primary focus of prisons from rehabilitation toward punishment. As a result, prison and jail treatments were increasingly rough and unable to provide adequate medical support to incarcerated populations. This failure prompted a series of legal challenges, most notably the landmark Supreme Court decision in Estelle v. Gamble in 1976, which ruled that deliberate indifference by prison personnel to a prisoner’s serious illness or injury constitutes a violation of the Eighth Amendment, which protects individuals against cruel and unusual punishment [9]. The case established a legal foundation for minimum healthcare standards in correctional facilities and simultaneously catalyzed the growth of private healthcare providers in the sector. The trend toward formalized standards continued with the publication of guidelines by the Commission of Accreditation for Corrections in 1977, which established expectations for both the operation of jails and prisons and the provision of adequate healthcare services [10].

In the present day, healthcare has become the second largest expense category for correctional facilities, trailing only behind labor costs associated with salaries and overtime for correctional officers. Consequently, correctional healthcare has grown into a massive industry [11]. As of 2022, the U.S. correctional healthcare market is estimated to exceed $9.3bn in value [12]. Private providers also flourished as a result: a 2020 study saw that over 60% of jails outsource their healthcare services to private providers [12]. The trend of outsourcing occurs due to two main reasons: it shields counties and other government stakeholders from potential liabilities arising from inadequate care, and often is more cost-effective relative to alternative in-house healthcare models. A reason for these savings is the highly competitive nature of the contract bidding processes. Prison healthcare providers participate in a bidding process at either the national, state, or municipal level, after which the government’s legislature must approve the contract.

These advantages are supported by the design of each contract structure. For one, a common element is indemnification provisions, which make the correctional healthcare provider responsible for the costs, expenses, and liabilities associated with delivering healthcare services. These provisions protect government partners from legal and financial liabilities within prisons, while simultaneously granting the healthcare providers substantial control over how they allocate their expenses. Moreover, the fee models used by these largest private healthcare providers typically charge on a per-inmate, per day basis. This means that most contracts don’t need to specifically cater towards any patient needs. This fixed fee structure creates a financial incentive to minimize the cost of care per individual, since any expenses incurred in providing care do not impact revenue, and any budget not spent towards patient care translates directly into more net income. Thus, in practice, there is minimal incentive to provide comprehensive and quality care since they are a pure negative on profitability. 

In recent years, some of Wellpath’s contracts have incorporated a management fee structure rather than a pure fixed fee model. For example, the company’s three-year contract renewal with Caroline County in 2023 passes through the actual costs of medical care to the government entities and generates revenue from administrative fees for managing the program [13]. However, the majority of Wellpath’s contracts still follow the traditional per-inmate, per-day model, maintaining strong incentives to manage costs, often at the direct cost of quality of care delivered to incarcerated people.

Although the contract bidding process is competitive, the industry itself experiences a bifurcation between small regional players and large national healthcare providers; this is partially a result of private equity interest in the industry, whose roll-ups have created large-scale providers across the United States. By the number of inmates served, some of the largest correctional healthcare providers in the United States are Centurion Health (owner undisclosed), which serves 275,000 incarcerated people; Wellpath (owned by H.I.G. Capital), which serves over 200,000; and Corizon Health (owned by Perigrove Capital), which serves 115,000 [14] [15]. Based on the total number of incarcerated people in the United States, these three providers collectively account for roughly 30% of the total incarcerated people served, not just within the private correctional healthcare industry, but across the overall correctional healthcare industry (which includes other forms of service models, such as direct provision through government agencies or partnering with public hospital systems). This demonstrates the significant market concentration within private correctional healthcare and the limited number of service providers available for local governments to administer prison healthcare programs with.

While Wellpath steadily expanded its revenue and market presence since its founding, this growth came with significant legal and operational challenges that ultimately contributed to rising litigation expenses and sustained cash burn. To start, Wellpath’s inability to deliver adequate medical care under key contracts triggered investigations and lawsuits that ultimately resulted in significant tort claims. Since its founding, Wellpath had faced approximately 1,500 lawsuits filed by inmates, families, and civil rights groups, alleging chronic understaffing, delays or denials of care, and the controversial use of drugs on patients with mental health concerns [16]. This resulted in significant expenses related to professional liability insurance, which covers medical malpractice and wrongful death claims. Investigations found many cases where inmate deaths could have been prevented if they had been intervened properly, creating various malpractice and wrongful death lawsuits. Between 2019 and 2023, Wellpath faced multiple lawsuits, resulting in $110mm of cash settlement payments [1]. On top of this, they also had an equal amount of unpaid tort claims, which ultimately reached $112mm and would become a significant portion of Wellpath’s unsecured claims [1]. 

On top of the recurring settlement costs, the substantial rise in healthcare and labor costs during the pandemic further compounded their difficulties. The company estimated pandemic-driven material and labor cost increases at approximately $30mm and $50mm, respectively, between fiscal years 2020 and 2022, with labor expenses particularly impacting the LG Division [1]. This represents an annual cost increase equivalent to 2% of annual revenue, and reduced the company’s EBITDA margin from 5.4% to 3.4%, representing a ~40% decrease in EBITDA margin given the very low initial profitability. Additionally, annualizing for the impacts of increased litigation costs and operational costs, Wellpath incurred an additional $68mm ($28mm from litigation and $40mm in opex) in costs through their operations, which is roughly 4% as a percentage of their revenue. The increase in operating costs was further exacerbated by problems across several contracts, which strained Wellpath’s gross profit margin and contributed to tort liabilities:  

Massachusetts Contracts: In 2018, Wellpath was contracted to provide medical care for all Massachusetts state prisons for $119mm, serving roughly 6,000 inmates across 14 state prisons. The Civil Rights Division and the U.S. Attorney’s Office for the District of Massachusetts initiated an investigation in 2018 regarding the quality of care provided in state prisons. By 2020, the investigation concluded that the Massachusetts Department of Correction violated the Eighth Amendment by failing to adequately provide mental health care to incarcerated individuals. The issue culminated in a $7mm settlement to affected individuals in December 2022, during the period in which Wellpath served as the sole contractor. Following the settlement and the expiration of the original six-year term, Massachusetts decided to terminate the contract in 2022, representing 6% of its total revenue [17]. 

Michigan and Georgia Contracts: Wellpath onboarded these contracts in 2022, with the Michigan contract being worth $77mm annually (representing 4% of revenue) and the Georgia contract being undisclosed. Upon onboarding, Wellpath faced a backlog in care services needed due to the lack of provision from their prior healthcare provider. This resulted in increasing service utilization and negative gross profit of approximately $40mm from 2022 through H1 2024 across Michigan and Georgia contracts. The $111mm Michigan contract was terminated by the state in April 2024 [18]. In September 2024, Michigan filed a lawsuit against Wellpath for alleged contract breaches, claiming the company failed to pay subcontractors and hospitals over $35mm for medical services provided to prisoners between 2022 and 2024, including unpaid wages for roughly 25% of hospital nursing staff [19].

County Contracts:  Wellpath also maintained contracts with various counties, including the Suffolk County Sheriff’s Department (Boston), Barnstable County (Barnstable), and Lackawanna County (Scranton). These contracts were terminated due to understaffing and inadequate care between 2022 and 2024. Although exact contract figures are undisclosed, reports highlight severe operational issues. Barnstable County noted that Wellpath operated at only 20% of the required staffing level, necessitating close oversight. Suffolk County faced an $18mm class action settlement for substandard care, and Lackawanna County alleged that Wellpath overcharged nearly $1mm during its contract period [20].

Wellpath was experiencing a reinforcing cycle of operational underperformance and escalating legal exposure. The chronic understaffing and insufficient care led to expensive lawsuits; cost challenges associated with inflation and backlogs of services needed hurt profitability, creating an incentive to reduce costs that further increased tort claims. These issues began to get reflected in their cash flow and liquidity. As of September 2022, Wellpath had $23mm of cash on hand, with a full-year cash burn of $45mm [21]. In March 2023, S&P downgraded the company from B- to CCC+, pointing to very thin EBITDA margins driven by higher staffing and pharmacy costs, as well as the limited liquidity across both cash balance and revolver [22]. A year later, by September 2023, the company had incurred an additional $15mm in cash burn, leaving $36mm of cash on hand after drawing down $34mm of their $65mm revolver [23]. Recognizing that they had limited liquidity, Wellpath negotiated and reached a deal with their prepetition revolver lenders to extend the maturity to October 2024 from October 2023, in exchange for maintaining a minimum liquidity of at least $20mm [1]. Despite the maturity extension, the October 2024 date, alongside a significant $473mm maturity wall in October 2025, created significant pressure for Wellpath to address its cash burn and liquidity constraints. In addition, the $112mm of tort claims accumulated throughout the years had to be addressed. As Wellpath has burned $60mm of cash in their past two years’ operations, the underperformance was not a one-time issue, and they had little time to turn around their operations. 

Recognizing the need to improve its liquidity, Wellpath engaged Lazard and launched an out-of-court sales process for its Recovery Solutions behavioral health division in January 2024. They aimed to use the proceeds from the sale to repay the prepetition Revolving Credit Facility and request an extension for the remaining debt obligations. Lazard reached out to 140 potential parties to solicit proposals, over 70 of which executed confidentiality agreements. By the end of June 2024, six preliminary indications of interest had been received. The marketing process continued through July and August, but only one formal second-round bid was submitted, at a valuation lower than the initial indications of interest. As a result, the company was not able to effectuate an out-of-court sale. While the submitted bids and valuations were not disclosed, the eventual stalking horse offer bid for this part of this business would be $375mm. Compared to the previous estimated TEV of ~$1bn during its 2018 buyout, this provides a proxy of the segment’s value at roughly ~40% of the entire business. 

Therefore, Wellpath pivoted to prioritize engaging with its creditors to explore restructuring solutions. In August 2024, Wellpath engaged with the Ad Hoc Group (AHG), composed of certain first lien and second lien lenders and advised by Houlihan Lokey, to discuss potential out-of-court solutions. On August 30th, 2024, they executed Forbearance Agreements, which waived actions relating to defaults on cash interest payments and the amortization obligations under the revolving credit facility, as well as its maturity. This allowed the company to preserve liquidity and bought them a bit more time as they conducted negotiations. 

As the RSA negotiations continued, Wellpath was quickly running out of time. By October 2024, the company had missed principal and interest payments on both its first lien and second lien term loans, with only a few days remaining before the forbearance deadline of November 15th, 2024.  At this point, its $65mm revolver was nearly fully drawn, leaving little option other than an in-court filing [24]. The inevitability of filing was also beginning to get recognized by the market. At the beginning of November 2024, the second lien term loan due 2026 collapsed in pricing, falling from 50 cents as of September 2024 to 4 cents on the dollar, reflecting the market’s recognition of Wellpath’s imminent Chapter 11 and the limited potential recovery.

Following negotiations with the AHG regarding an in-court solution, the parties executed an RSA and filed for bankruptcy on  November 11th, 2024. Wellpath wanted to pursue an accelerated Chapter 11 process, citing the nature of their business and vulnerability of their patient population. Based on the DIP milestones, the company was aiming to have the plan confirmed by February 26th, 2025, and to emerge by March 17th, 2025. The RSA included several key terms:

Debtor in Possession (DIP) Financing: The agreement provided for a total of $522mm in DIP financing, consisting of $105mm in new money term loans and $417mm in roll-up of prepetition secured debt. A roll-up is the conversion of prepetition debt into DIP financing, which typically benefits from more favorable economic terms and a higher repayment priority on the capital structure. In Wellpath’s case, the new money facility had an interest rate at SOFR + 7.25%, while the roll-up portion had an interest rate at SOFR + 6.93%. All prepetition lenders were allowed to participate in the $105mm new money term loan, which would allow them to roll a portion of their prepetition debt into the DIP facility. Prepetition first lien term loan holders were able to roll up their debt at a 3.95:1.00 ratio relative to their DIP funding, while prepetition second lien term loan holders could roll up at a 0.50:1.00 ratio. This provides a more favorable treatment to the first lien than the second lien lenders, since they get to convert $3.95 of their first lien claims into DIP claims for every $1 of new DIP financing funded, compared to the second lien’s $0.50 for every $1 funded. 

Section 363 Sale and Equity Financing: The RSA contemplated an open marketing process for substantially all or selected portions of Wellpath’s assets. Specifically, for the Corrections Health segment, DIP lenders committed to a direct private placement of new equity interests in the reorganized Wellpath, subject to a post petition marketing process for sales under Section 363 of the Bankruptcy Code. The bidding process was designed as a dual track structure to provide flexibility and accommodate varying interests across the Recovery Solutions, LG, and SF divisions. On the other hand, the Recovery Solutions business was going to be marketed for a WholeCo sale, and had a stalking horse offer bid from the AHG of up to $375mm. This is referred to as a credit bid, where creditors use their owed claims to bid during a company’s in court sales process, allowing them to use their debt claim instead of pay in cash. Oftentimes, the credit bid is the stalking horse offer bid to establish a floor for the bidding procedure, avoiding situations where there is only one bidder who gets to own the company at low valuations. 

Claims Treatment: The classes of debt that were deemed to be impaired and entitled to vote were the First Lien Claims, Second Lien Claims, and General Unsecured Claims (GUCs). Wellpath proposed treatments based off of three separate restructuring outcomes: a WholeCo sale, a Corrections business restructuring (where the Recovery Solutions business gets sold), or a Corrections business asset sale (where the Recovery Solutions business also gets sold). A WholeCo sale refers to the sale of substantially all of the debtor’s assets; a Corrections restructuring refers to (1) the sale of the Recovery Solutions Business, (2) the issuance of new common equity, or (3) the issuance of a takeback facility; and finally, a Corrections Asset sale refers to the sale of some or all assets related to the Corrections division. With this in mind, the treatments were as follows: 

First Lien Claim Treatment:

(A) If a WholeCo sale occurred, holders would receive first lien collateral proceeds after revolver and administrative claims. Projected recoveries under the RSA were not specified.

(B) If a Corrections Business restructuring occurred, and First Lien Claims were not fully repaid through the asset sale proceeds or credit bid ownership of the Recovery Solutions Business, each holder would receive its pro rata share of (1) 3% of post petition common equity, subject only to dilution from the Management Incentive Plan (MIP); (2) $125mm of takeback debt; and (3) first lien collateral proceeds from the Recovery Solutions sale.

(C) If a Corrections Asset Sale occurred, holders of First Lien Claims would receive their share of the first lien collateral proceeds generated by the sale, after satisfaction of revolver and administrative claims. 

Second Lien Claim Treatment:

(A) If a WholeCo sale occurred, holders would again receive second lien collateral proceeds after revolver, first lien, and administrative claims. Projected recoveries under the RSA were not specified.

(B) If a Corrections Business restructuring occurred, holders would receive their share of second lien collateral proceeds generated by the Recovery Solutions sale, after revolver and administrative claims. This treatment differs from the First Lien’s due to their higher priority of claim on the assets, as well as due to the takeback debt cap being $125mm to ensure sufficient leverage reduction post emergence. 

(C) If a Corrections Asset Sale occurred, holders would receive second lien collateral proceeds from the sale, after satisfaction of revolver, first lien, and administrative claims. 

First Lien and Second Lien Deficiency Claims:

Because the value of Wellpath’s assets was not enough to fully cover what was owed to the first and second lien lenders, the RSA also included provisions for parts of their claims that became deficiency claims. The remaining unpaid portions of these loans were treated the pari passu (the same) as unsecured claims. Under the RSA, these first and second lien deficiency claims were given small placeholder interests in a liquidating trust, but their actual recovery amounts were not defined.

General Unsecured Claims (GUC) Treatment: Composed of payables, vendor claims, and tort claims. GUCs were assigned a placeholder percentage of interests in a liquidating trust, along with any remaining cash proceeds after satisfaction of higher priority claims, under all three restructuring outcomes. The RSA did not specify projected recoveries - this would later become important as a major point of contention among unsecured creditors during the Chapter 11 process.

The RSA ultimately received support from 85% of its first lien lenders and over 80% of its second lien lenders. With the RSA finalized, the company filed for bankruptcy on November 11th, 2024. 

Despite the high level of creditor support, Wellpath faced a series of challenges and resulting modifications that delayed its plan confirmation by two months. The challenges were as follows: 

DIP Financing

During the Chapter 11 proceedings, the U.S. Trustee raised objections over the structure of Wellpath’s proposed DIP financing, citing the aggressiveness of the roll-up ratio. The primary concern was that the DIP structure would disproportionately benefit prepetition lenders by allowing them to get a higher claim at the expense of unsecured creditors, rather than providing substantial new money and liquidity to the company. The U.S. Trustee and the Unsecured Creditors Committee (UCC) both expressed that the roll-up would encumber assets that were supposed to be distributed to the unsecured creditors, which include the tort claims from Wellpath’s medical malpractices. 

This objection is not unique to Wellpath, however. This type of objection has become increasingly common in recent years, as roll-up structures have grown more aggressive. U.S. Trustees and UCCs have argued that such arrangements favor secured creditors by converting prepetition debt into higher priority claims while doing little to stabilize a debtor’s liquidity position. For example, this concern was also raised in the Red Lobster Chapter 11, where the UCC objected to how the assets backing the roll-up portion of the DIP financing were providing further claims for the secured creditors, rather than being used to raise new financing and thus more liquidity for Red Lobster. 

Following these objections, Wellpath entered into negotiations with its lender group to modify the DIP facility. The debtors ultimately reached a consensual resolution with the U.S. Trustee and the UCC. In December 2024, the DIP was approved on an interim basis after roll-up terms were revised to be less aggressive. The total DIP financing amounted to up to $362mm, consisting of $105mm in new money, of which $45mm was immediately available, and $60mm was structured as a delayed draw term loan. The remaining $257mm was a roll-up of prepetition term loans. The total DIP amount was lowered from the RSA’s $522mm DIP financing proposal, which maintained the same $105mm of new money but a more aggressive roll-up amount at $417mm. The roll-up ratio for first lien loans was reduced from 3.95:1.00 to 2.43:1.00; and for second lien loans, from 0.50:1.00 to 0.16:1.00. Overall, the revised DIP reduced total DIP by $160mm and decreased the roll-up by $160mm, while keeping new money commitments unchanged at $105mm.

Section 363 Asset Sale 

Consistent with the RSA, Wellpath launched a sale of two asset categories: Recovery Solutions and Corrections  Assets in court. As a reminder, the Recovery Solutions segment had a credit bid of $375mm from the AHG for the sale of substantially all of the segment’s assets. During the Chapter 11 process, they ran two separate post-petition marketing processes but received no qualified competing bids (of higher value than the $375mm), so they ultimately proceeded with the stalking horse bidder. 

However, an objection was made to the Asset Purchase Agreement (APA), which raised substantial concerns about terms that could harm the marketability of the Debtors’ remaining Corrections Assets. Specifically, the objection argued that the Recovery Solutions stalking horse agreement failed to properly delineate between assets included in the sale and those remaining with the Corrections business. This lack of clarity could deter potential bidders, as a prospective Corrections buyer would not know which assets were still available versus categorized as Recovery Solutions. It also created further operational risk, since they could be transferring assets critical to the Corrections business. 

After revising the APA to define the assets being sold and defining the overall offer as a $395mm credit bid, Judge Perez approved the sale due to the fact that no outside buyer offered a higher bid than the stalking horse offer bid of $395mm [33]. With this sale approved, and with no qualified bid received for the Corrections Assets, the Corrections Health segment underwent a business restructuring through a private placement equity investment by the AHG, after they failed to generate interest for a sale of divisions. The AHG provided $55mm of equity investment for Corrections Health, which would hand 97% over of the equity of post emergence Wellpath (which only has the Corrections Health segment left, after the Recovery Solutions segment was sold via the credit bid) to DIP lenders. The other 3% would go towards the non-participating first lien creditors, and both of their claims would be diluted by the Management Incentive Plan (MIP). This therefore implies a post-emergence equity value at $57mm, a stark contrast compared to the estimated equity value of $410mm of H.I.G.’s 2018 buyout. 

Plan Amendment 

The lack of clarity in addressing tort claims also became an important point of contention near the end of January 2025. The initial RSA outlined above was objected to by the UCC, which argued that it offered minimal recovery to unsecured creditors, most of whom are incarcerated individuals, as well as families of deceased prisoners. As a reminder, under the RSA, GUCs were assigned a placeholder percentage of interests in a liquidating trust, but the agreement did not specify projected recoveries for the GUCs. Other factors also worsened the perception of this uncertain treatment. First of all, the third-party insurance providers used by Wellpath only provide coverage for claims exceeding $15mm, whereas most tort claims fall below that threshold. 

However, in Wellpath’s case, the problem was how its insurance was structured. On paper, it looked like the company had three layers of insurance. But in reality, those insurance layers were different legal entities owned by Wellpath, so there wasn’t any real outside insurance to pay out claims below $15mm. As a result, there is effectively no insurance coverage for these individuals, making their recovery entirely reliant on the distribution to GUCs. 

On top of this issue, Wellpath proposed a MIP of up to $4.6mm for its 12 executives while their uncertain tort claim treatments were being challenged in January 2024. While the absolute value of payout was not significant, it created a poor impression to the public that senior management’s interests were being prioritized when the recovery for tort claimants remained unclear [25]. As a result, Judge Perez expressed concern during a hearing over the lack of detail regarding the treatment of unsecured creditors. Consequently, Wellpath was required to undergo significant plan amendments, announcing that they would submit revised plan disclosures by February 10th, 2025. In addition, they withdrew the proposed $4.6mm management bonus program, retaining only a key employee retention plan worth up to $3mm for mid-level employees.

Special Committee Investigation and Global Settlement

Through a series of negotiations with the AHG, the UCC, and H.I.G., Wellpath was ultimately able to confirm the liquidation trust contributions for the UCC and reach a comprehensive global settlement in April 2025. Alongside the Chapter 11 proceedings, a special committee conducted an independent investigation into potential litigation claims against the sponsor, H.I.G. Capital. The committee concluded that because of the cost, complexity, and risk of pursuing litigation against H.I.G., it would not be in the best interest of the debtors’ estates to use their resources on claims of uncertain value.

Ultimately, through negotiations, Wellpath reached a settlement with H.I.G. where H.I.G. would bring approximately $25.1mm in value to Wellpath. Under the terms of the agreement, H.I.G. would fund a $2.55mm settlement, with $150,000 payable upon execution and $2.4mm due upon entry of a final, unstayed court order approving the settlement. The debtors were authorized to use these payments to cover all costs associated with obtaining court approval. In addition, H.I.G. waived its monetary claims against Wellpath and consented to contribute the proceeds of the directors and officers (D&O) insurance policies to the liquidation trust. This structure basically released any liabilities tied to H.I.G.’s insurance coverage while limiting the release of H.I.G. personnel to claims exceeding the scope of the D&O policy. In exchange, the debtors agreed to provide H.I.G. and its employees with all releases of claims in a form acceptable to H.I.G.

On April 15th, 2025, H.I.G. revised its contribution to increase its cash payment to $3mm, and Wellpath filed a motion to approve for a settlement with H.I.G. As a result, the total amount of cash allocated to the liquidating trust ultimately reached $15.5mm, with $3mm from H.I.G. and $12.5mm from cash on hand from Wellpath [26]. The UCC supported the amended settlement, citing that H.I.G.’s additional funding increased recovery under the litigation trust and provided a clearer path toward recovery for unsecured creditors. Under the final terms, the liquidating trust would receive: (1) $10mm in secured first lien takeback debt (which was previously allocated to the first lien creditors), (2) $15.5mm in cash contribution, and (3) one-third of the common stock in the reorganized debtors. This increased the estimated potential recovery for unsecured creditors from 0.8% to 6%, significantly improving unsecured creditor recoveries. As a result, a global settlement was reached between Wellpath, the AHG of lenders, and the UCC. 

Nonconsensual Third Party Release

Another issue that arose near the end of Wellpath’s bankruptcy concerned nonconsensual third-party releases. Under the plan, creditors, including unsecured claims largely composed of incarcerated individuals, were automatically released from their claims against third-party nondebtors unless they explicitly opted out of the release (by submitting an opt-out form or checking a box on the ballot). The U.S. Trustee raised an issue against what constitutes consent, citing the Supreme Court’s ruling in Harrington v. Purdue, which held that the bankruptcy code does not authorize nonconsensual third-party releases in Chapter 11 reorganization plans [27]. This means that when bankrupt companies owe claimants, a bankruptcy plan cannot force these claimants to give up their claims unless they have explicitly agreed to the release. 

Consistent with this ruling, the U.S. Trustee objected to the plan’s confirmation, arguing that the opt-out procedures did not satisfy the requirements to establish consent under state law, as well as the fact that there was a lack of consideration provided to releasing parties in exchange for granting a release. Many incarcerated claimants who joined the hearing virtually also agreed with this concern, saying that inmates often receive mail several days late or not at all, making it difficult or impossible for them to opt out in time. In addition, many inmates may not fully understand the legal paperwork, so their lack of comprehension should not be treated as affirmative consent to release their claims.

However, Judge Perez overruled all objections to the plan on the basis that the plan already provided substantial recovery relative to the company’s circumstances. Under the plan, first lien claims would receive only 50% recovery (comprising 3% of common equity and $115mm of takeback debt), while second lien claims would receive the same treatment as unsecured creditors, who had an estimated recovery of about 6% from their interests in the liquidating trust [28]. The first lien and second lien deficiency claims, representing 13% of post emergence equity, were also waived and placed into the liquidation trust for distribution. Compared to the initial treatment, which had projected only 0.8% recovery for general unsecured creditors, the revised liquidation structure provided a significantly improved outcome. 

With these objections overruled, the court confirmed the Chapter 11 plan on April 30th, 2025. The restructuring ultimately reduced Wellpath’s debt burden by approximately $550mm, facilitated the sale of the Recovery Solutions business, and included an additional $55mm liquidity injection from the Ad Hoc Group of lenders, who have since then become Wellpath’s new owners.

Ever since Wellpath emerged from bankruptcy, it has continued to serve its previous contracts, operating within the State and Federal (SF) and the Local Government (LG) segments, and maintaining operations across roughly 350 community detention facilities and 135 adult and juvenile centers nationwide. Since emerging, the company has undertaken a series of operational restructurings focused on stabilizing cash flow and exiting from underperforming or unprofitable contracts. For example, in April 2025, Wellpath reduced its Tennessee workforce by 64 employees, and later in October 2025, it announced an additional 91 layoffs associated alongside the permanent closure of five Nashville offices [29] [30]. At the same time, Wellpath continues to navigate challenges relating to contract terminations, and activism against alleged medical malpractice. For example, across Santa Barbara County and Monterey County advocacy groups have raised concerns on inadequate medical care standards. A series of contracts were also being renegotiated, for example, in the Arkansas Department of Corrections.

Given that Wellpath’s financial distress was a result of certain unprofitable contracts, mounting litigation settlements, and inflation induced cost pressures, their ability to sustain operations will depend on their ability to acquire profitable contracts, manage costs more efficiently, and mitigate the number of litigations. While Chapter 11 is often associated with traditional operational distress or overleveraged capital structures, Wellpath’s case highlights how significant legal liabilities can also drive distress. Their restructuring process allowed them to consolidate and address a large number of tort claims through a centralized forum rather than through fragmented litigation across multiple jurisdictions. Although this approach has drawn criticism and controversy for potentially limiting recoveries for tort claimants, it also allowed the company to preserve essential healthcare services across hundreds of facilities. 

The broader correctional healthcare industry has also faced similar challenges. Between 2023 and 2024, three major providers, Corizon Health (also known as Tehum Care Services), Armor Health, and Wellpath, each filed for bankruptcy due to massive legal claims. Alongside Wellpath, Corizon Health had billions in settlement claims when they filed, whereas Armor Health had $150mm in unsecured claims largely from medical negligence lawsuits [31]. These cases have prompted controversy amongst prisoner rights advocates about the accountability in using Chapter 11 as a tool to shield companies from litigation. Nonetheless, in Wellpath, the restructuring was needed for them to continue operating as a going concern, and a liquidation scenario would have led to no recovery for their unsecured creditors. It is now better positioned to turn around its operations by cutting costs and renegotiating its contracts. In this sense, the Chapter 11 process, while controversial, still serves as an essential mechanism for these correctional healthcare companies to continue delivering their services.