Wellpath, LLC, the medical provider for the Department of Corrections in Pennsylvania, filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code in the Southern District of Texas on November 11, 2024. This is devastating news for those who have been denied adequate medical care by Wellpath’s employees.
For those who have been injured by Wellpath, the sole avenue to preserve the potential for recovery is to file a “proof of claim” in the bankruptcy proceeding, as explained further below. The proof of claim does nothing more than notify Wellpath that a personal injury claimant has a claim for which he or she is seeking compensation, and puts the claimant in line behind many of the other creditors whom Wellpath owes money.
Currently, we understand that Wellpath has about $100 million in assets, to satisfy approximately $640 million worth of debt. In practical terms, this means that people who have been injured by Wellpath, if they get anything at all, will be forced to accept a small fraction of the value of their claim.
This article provides general information on the Chapter 11 bankruptcy process and how Wellpath’s bankruptcy may affect those harmed by the denial of adequate medical care by Wellpath’s employees. Bankruptcy is a complex area of law, full of nuance and exceptions, many of which are not addressed in this article. This article is not intended to provide any legal advice, nor does it create an attorney-client relationship.
The Bankruptcy Process
Bankruptcy is a legal proceeding initiated, voluntarily or involuntarily, when a person or business, called the “debtor,” cannot repay their outstanding debts. Chapter 11 bankruptcy, commonly referred to as “reorganization bankruptcy,” is commonly used by companies because it allows a business to remain in business while restructuring its debts and assets. During this period, the business cannot sell its assets, start or terminate a rental agreement, nor stop or expand business operations without the bankruptcy court’s permission.
The essential stages of a Chapter 11 bankruptcy include: (1) filing the bankruptcy petition; (2) the imposition of an automatic stay; (3) development of the plan of reorganization; (4) disclosure statement and plan disclosure; (5) creditor voting; (6) confirmation hearing; (7) plan implementation; and (8) discharge.
The Bankruptcy Petition and Automatic Stay
A debtor initiates the Chapter 11 Bankruptcy proceedings by filing a petition with the bankruptcy court. After bankruptcy proceedings commence, an automatic stay is placed on all claims against the debtor. The automatic stay suspends all judgments, collection activities, foreclosures, and most lawsuits, preventing creditors from pursuing any debts or claims which arose prior to the bankruptcy petition.
As applied to Wellpath, the automatic stay suspends all pending lawsuits against Wellpath while suspending the filing of new lawsuits against Wellpath for any pre-petition conduct. In addition, the bankruptcy court’s current order also immediately halts all pending lawsuits against Wellpath, the automatic stay does not apply to non-bankrupt co-defendants, including other parties responsible for a patient’s inadequate care if that party is an independent contractor – not an employee – of Wellpath. This means claims against any medical directors or doctors working with Wellpath as an independent contractor may still proceed.
Proof of Claim
Those with claims against Wellpath, called “creditors,” must file a “proof of claim” to preserve the possibility of being compensated for it. A proof of claim documents a creditor’s right to repayment from a debtor. It describes the type of claim, priority status, and amount of debt that the debtor owes to the creditor. Once a debtor files for bankruptcy, the debtor files a schedule of assets and liabilities, listing its debt. If a creditor’s debt is unlisted on the debtor’s schedule of liabilities, or designates the debt as disputed, a creditor must file a proof of claim to ensure the possibility of payment of the debt.
There are three types of debts which a creditor may have: secured debt, priority unsecured debt, and nonpriority unsecured debt. Each type of debt has a different priority, which is the order that each debt is paid. More money is allocated to pay the debts which have higher priority.
Personal injury claims fall within the nonpriority unsecured debt category, which is the lowest priority debt in the bankruptcy process. This means that personal injury claimants receive the least amount of money, even though they have the largest amount of claims. With $100 million of assets and four to five times that amount in debt, there will be very little money to pay a lot of claims. It is commonly said that a proof of claim “gets pennies on the dollar.”
Any person who has a claim against Wellpath which arose prior to November 11, 2024, and who does not file a proof of claim in the bankruptcy proceeding, will forever lose the right to seek compensation for that claim.
Timeline for the Plan of Reorganization
Once a bankruptcy proceeding begins, the U.S. trustee is responsible for monitoring the progress of the proceeding. The U.S. trustee monitors the administration of the bankruptcy proceeding, applications for compensation, creditors’ committees, and plans filed with the bankruptcy court. The U.S. trustee appoints creditors’ committees, usually consisting of the creditors who hold the seven largest unsecured claims against the debtor. The U.S. trustee then conducts a meeting with the creditors, governed by 11 USC § 341, called the “Section 341 meeting.”
The debtor has a 120-day period where it has the exclusive right to file its plan of reorganization. The bankruptcy court may extend or reduce this time period, but may not extend the exclusivity period beyond eighteen months. After the expiration of the debtor’s exclusivity period to file a plan, a creditor may file a competing plan of reorganization.
Unless the court, the U.S. trustee, the creditors’ committee, or another party acts to progress the proceeding, a chapter 11 bankruptcy case may continue for years. A creditor’s ability to propose a plan of reorganization after the debtor’s exclusivity period expires creates an incentive for the debtor to avoid delay by filing a plan within its exclusivity period. This makes an estimate of when Wellpath’s plan of reorganization will be filed, accepted, and confirmed difficult to predict.
Acceptance of the Disclosure Statement and Plan of Reorganization
The plan of reorganization is generally decided by a vote of a debtor’s creditors. However, the bankruptcy debtor, or any other party proposing a plan of reorganization, must get court approval of a written disclosure statement prior to any vote on a plan of reorganization. After the disclosure statement is filed with the bankruptcy court, the court holds a hearing regarding the approval of the disclosure statement.
Once a disclosure statement is approved, the proponent of the plan of reorganization must mail all creditors: (1) the plan of reorganization, or an approved summary; (2) the court-approved disclosure statement; (3) notice of when to file an acceptance or rejection of the plan; (4) notice of the deadline to file for filing objections; (5) notice of the date and time of the hearing on the confirmation of the reorganization plan; and (6) a ballot for accepting or rejecting the plan.
A reorganization plan must designate classes of claims for treatment under it. This means that the plan will specify the amount of money allocated towards paying the different categories of creditors. Each class of creditors then votes on the plan of reorganization. If creditors holding at least two-thirds of the debt and more than one-half of the number of claims in the class accept the plan, bankruptcy law holds that the entire class accepts the plan.
Under a reorganization plan, some classes of creditor claims may be unpaid, or not paid in full. These claims are called “impaired claims.” If there are any impaired claims, the court cannot confirm the plan of reorganization unless at least one class of impaired claims accepts the plan. Holders of unimpaired claims are deemed to have accepted the plan under the bankruptcy code.
Any interested party may file an objection to the confirmation of a plan of reorganization. If there is an objection to the plan’s confirmation, the bankruptcy court must hold a hearing regarding the plan’s confirmation. If there are no objections, the bankruptcy court must only determine whether the plan was proposed in good faith and according to bankruptcy law.
Discharge of Claims
Generally, after the confirmation of the plan of reorganization, all prior claims against the debtor are discharged. The debtor must make payments under the plan of reorganization, which replaces the debtor’s prior obligations. While there are certain types of claims that are not discharged upon the confirmation of the plan of reorganization, a claim arising from the denial of adequate medical care likely does not fit within one of the statutory exceptions.
Prior to the discharge of claims under the confirmation of the plan of reorganization, the creditor must receive notice that their claim may be discharged in bankruptcy. This notice must comply with due process. If the debtor knows the name and address of a claimant, then the claimant is entitled to having this notice sent directly to them. If a potential claimant is unknown by the creditor, then the creditor can comply with its due process notice obligations by publishing the notice.
This means that all claims against Wellpath for the denial of adequate medical care will likely be discharged upon the confirmation of Wellpath’s plan of reorganization. This discharge applies to all pending claims, conduct occurring prior to Wellpath’s bankruptcy petition, and claims arising after the petition but prior to the confirmation of Wellpath’s plan of reorganization.
In summary, the automatic stay following Wellpath’s bankruptcy immediately halts all litigation against Wellpath until after the confirmation of the plan of reorganization, even if a claim against Wellpath has yet to be filed. Upon the confirmation of the plan of reorganization, any claims against Wellpath arising prior to the confirmation, regardless of whether that claim has been filed, will be discharged by the plan’s confirmation. While a proof of claim does not guarantee any payment from Wellpath’s bankruptcy proceeding, it is the sole avenue to preserve potential recovery from Wellpath for claims arising prior to the plan’s confirmation.