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The Ponzi-Friendliest Court in America

Steward Health just filed for bankruptcy in Houston’s scandal-plagued, private equity-pilled bankruptcy court.

The "complex cases panel" in the Southern District of Texas handles more big bankruptcies than anywhere in the country,Keith Burtis/Creative Commons

A massive chain of crumbling safety net hospitals that Sen. Elizabeth Warren (D-MA) has described as a “ponzi scheme” filed for bankruptcy protection today in the notoriously “debtor friendly” Southern District of Texas bankruptcy court, bringing new urgency to the glacial effort—inasmuch as one exists—to stabilize the hospitals’ finances and bring their jet-setting plunderers to justice. 

The hospital chain in question is, of course, Steward Health, a Boston-born, Dallas-headquartered collection of about 30 nightmarish hospitals mostly located in Florida and Massachusetts, from which insiders have siphoned well over $1 billion. Steward now owes nearly $300 million in unpaid compensation to physicians and other staffers and about $558 million to its top 30 non-insider creditors, including the Center for Medicare and Medicaid Services. 

The bankruptcy court is the Houston-based “complex cases panel” in Texas’s southern district, founded by the notorious Judge David R. Jones, who resigned in disgrace last fall after a small creditor in the bankruptcy of the oilfield services firm McDermott International revealed in a court filing that Jones was the live-in boyfriend of one of the attorneys working the bankruptcy, as well as dozens of others over which he had presided. In just one of the many details that connect the two scandals, McDermott’s then-chief financial officer John R. Castellano has been named Steward's chief restructuring officer.

As the Prospect explained in our investigation of the court, the complex cases panel has for years been the foremost destination of ponzified companies seeking to avoid questions and accountability. In the alleged name of speed and “efficiency,” Judge Jones and his former law partner Marvin Isgur quickly canceled all kinds of debts owed to small businesses, asbestos-poisoned retirees, unionized workforces, and retail investors. In the process, they let off the hook private equity firms and other corrupt insiders that had looted oil and gas drillers, retailers, restaurant chains, a prison health care contractor and at least one hospital chain, Pipeline Health, whose dubious 2022 bankruptcy plan was financed by a real estate investment trust called Medical Properties Trust, which also has deep financial ties with Steward. 

Enabling all this reverse wealth redistribution was the bankruptcy juggernaut Kirkland & Ellis, which the aforementioned creditor, Michael Van Deelen, has sued along with Jones for racketeering. An anonymous letter sent to the Prospect in March alleges that judges Jones and Isgur actually traveled to Chicago just before they established the complex cases panel in 2016 to explicitly promise Kirkland’s senior restructuring partners in person that if they began filing major cases, they would “be pleased with the result/outcome.” Not long afterward, Jones and Isgur—the only two judges in the court allowed to handle “complex” cases—were handling more big bankruptcies than any other judge in the country; in 2020 nearly half of all major corporate bankruptcies were filed in the district.

Since then, all the big-time bankruptcy law firms got into the action, many of them using a local firm in Houston called Jackson Walker. Liz Freeman, Jones’ former clerk and then mistress, became a partner at Jackson Walker and argued numerous cases in Jones’ court.

Steward’s firm is Weil Gotshal, which has filed the Chapter 11 cases of Apollo Global Management portfolio company Chuck E. Cheese, Advent International's Serta Simmons and a half dozen PE-controlled energy companies over the past few years. The Serta Simmons bankruptcy, in which Judge Jones endorsed an (allegedly illegal) deal Advent made to cram down haircuts on certain senior bondholders while privileging others, was particularly controversial, and after Jones resigned creditors sued to appeal the settlement. Steward’s lead bankruptcy attorneys, the $1,500 an hour Gabriel Morgan and the even pricier Ray Schrock, also handled the Serta Simmons restructuring.

Jones resigned from the bench in October, but his replacement is unlikely to differ too much from him ideologically: Alfredo Perez is a former Weil Gotshal partner. Steward’s bankruptcy has been assigned to Christopher Lopez, the panel’s rookie third judge, but Lopez frequently assigns his fellow bankruptcy judges to mediate disputes between creditors. So it’s possible that Perez will be invited in to deal with matters pertaining to a case brought by his former firm.

Steward is based in Dallas, not Houston, though unlike Sorrento Therapeutics and other recently bankrupt companies whose only asset in the district when they filed Chapter 11 was a UPS mailbox rented by a Jackson Walker attorney, the chain still operates a troubled hospital in downtown Houston that has been sued for nonpayment by five different vendors in 2024 alone. 

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AS THE PROSPECT has detailed extensively in previous articles, Steward was the 2010 creation of a narcissistic cardiac surgeon named Ralph de la Torre and the private equity firm Cerberus, which even at the time had a well-established track record of bankrupting portfolio companies for profit. Together they bought up distressed hospitals from Boston to Youngstown to Utah, mortgaged their assets to the hilt, and stiffed doctors, construction contractors, staffing agencies and even the lunchmeat company at one hospital cafeteria to make their interest payments and pay De La Torre’s inflated salary, which one individual familiar with Steward’s finances estimated at around $16 million per year. 

The hospitals languished without the substantial capital investment required to maintain and upgrade facilities. De La Torre’s supposedly disruptive “business model” began to look increasingly like a dangerous kickback scheme, and then in 2016 Cerberus sold its hospital buildings to Medical Properties Trust for more than twice their assessed value and pocketed the proceeds for their investors. The hospitals themselves were left reeling under the weight of impossible lease payments. 

Steward launched a quixotic expansion effort largely financed by MPT, picking up hospitals discarded by other private equity-owned chains and launching an international division supposedly aimed at converting state-owned hospitals overseas to destinations for “medical tourism.” Steward International’s first big venture involved privatizing three hospitals owned by the government of Malta, where prosecutors would eventually accuse Steward of defrauding the government of 400 million euros and using much of it to pay off various shell companies linked to cronies of the then-prime minister and his corrupt chief of staff Keith Schembri, who worked closely with Steward execs to fast-track the deal and was later charged with fraud, corruption and money laundering. In 2017 a friend and business partner of Schembri's paid two men to assassinate an investigative journalist who had been scrutinizing the hospital deal on her blog; Steward was eventually exiled from the tiny country. 

Back at home and flush with cash from the sale-leaseback, Cerberus was eager to exit Steward, which it finally managed to do in 2020 and 2021 with the help of a byzantine deal orchestrated by MPT, whereby De La Torre “bought” Steward from Cerberus for $335 million, then immediately turned around and used Steward's cash to pay himself a $100 million dividend, with which he purchased and renovated a $40 million mega-yacht. The company also acquired at least two business jets and a private suite at Dallas’s AA Arena, where the NBA’s Mavericks play. 

The hospitals continued to hemorrhage cash, and cope with their problems by simply not paying their bills. Dozens of small businesses sued Steward for nonpayment of services that had been rendered well over a year or more earlier. MPT, meanwhile, used a blend of deceptive accounting tricks, slow-walking and outright fraud to conceal the fact that Steward wasn't paying its $440 million annual rent bill.

The hospitals devolved into conditions a Louisiana physician interviewed by a federal health inspector described as “Third World.” In one Florida hospital where more than a half dozen nurses contacted the Prospect, no fewer than 5,000 bats infested the top floors, forcing the intensive care unit to move down to the second floor, where a burst pipe caused most of the sinks to back up with sewage. At another Steward hospital 30 miles down the highway, a physician described being pressured by Steward brass to refuse care to Medicaid patients and remotely supervise nurses via teleconference software who were performing complex procedures they were woefully unqualified to do. In Massachusetts, a new mother died during surgery after experiencing extensive blood loss at a Steward hospital shortly after the medical device supplier Penumbra repossessed an embolism coil designed to control postpartum bleeding.

Last week, a judge in Malta ordered authorities to seize the assets of De La Torre, two Steward executives and a whole host of the cronies to whom Steward had wired funds as part of its contract to run the Maltese hospitals. But in the United States, authorities have mostly dealt with Steward by sending angry letters. Sen. Warren has penned letters to Steward, De La Torre, Cerberus, MPT and the Australian investment firm Macquarie, asking pointed questions about how many dividends they’ve collected from Steward's carcass. After badgering MPT to disclose Steward's financials to its investors for years, the SEC finally sent the REIT one final irate letter announcing it was making public all its previous letters. 

Upon learning about the bankruptcy filing, the Massachusetts Attorney General Andrea Campbell issued a bland statement almost identical to one she issued four months ago about asking “questions” and demanding “accountability,” with one unintentionally amusing additional sentiment: “We expect the bankruptcy process to bring greater transparency and stability, as well as greater legal oversight over Steward’s operations than before.” Isn’t it pretty to think so! 

Sadly, because bankruptcy courts supersede all other civil proceedings, “greater legal oversight” will not be an outcome of Steward’s chapter 11 filing unless someone, somewhere decides to charge De La Torre, Cerberus, Medical Properties Trust and/or their many conspirators for some of the many crimes they have committed in the process of driving more than three dozen direly needed community hospitals into the ground. If only the Massachusetts Attorney General had the power to do something like that.

Maureen Tkacik is investigations editor at the Prospect and a senior fellow at the American Economic Liberties Project.

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