Steward Health gets green light to repay creditors with litigation proceeds

By Dietrich Knauth

July 16 (Reuters) - Bankrupt hospital network Steward Health Care received court approval on Wednesday to proceed with a liquidation plan that aims to repay its creditors with the proceeds of lawsuits against its former owners and insiders.

U.S. Bankruptcy Judge Christopher Lopez overruled objections to Steward's bankruptcy plan at a court hearing in Houston, Texas, despite uncertainty about Steward's ability to repay all expenses it racked up during its bankruptcy.

Those expenses must be paid in full before a Chapter 11 plan can take effect, and Steward expects to be able to fully repay those costs by mid-2027. Several objectors had argued the uncertainty of Steward's success in litigation and the long delay between bankruptcy court approval and the payment of necessary Chapter 11 expenses were fatal flaws in the company's repayment plan.

Steward, once the largest privately owned health network in the U.S., filed for Chapter 11 with $9 billion in debt, after its former private equity owner sold the land under its hospitals while embarking on an aggressive expansion strategy across 10 U.S. states. Members of Congress and state health officials have criticized the company for richly paying its executives while cutting medical services for patients.

The company owed huge debts to both its primary landlord, Medical Properties Trust, and to lenders that had extended credit for Steward's hospital operations, and the dueling debts complicated its efforts to sell the hospitals.

Objectors, including the state of Massachusetts, a group of doctors who are losing deferred compensation benefits promised by Steward, and the U.S. Department of Justice's bankruptcy watchdog, had argued that Steward was prioritizing payment of its bankruptcy lawyers over other mandatory expenses. Some objectors suggested that some legal fees could be clawed back to pay other creditors, such as vendors who continued to provide medical services to Steward after it filed for Chapter 11.

Lopez rejected the idea that Steward's bankruptcy professionals were "picking themselves over everyone else," saying that Steward's lawyers had prevented the complete collapse of a 31-hospital network that served 2 million patients annually, many of them in rural areas with few other healthcare options.

While Steward was not able to save all of its hospitals, most of them were transferred to new operators during the bankruptcy, work that was "extremely challenging," Lopez said.

Steward's primary bankruptcy law firm, Weil, Gotshal & Manges, billed more than $100 million from May 2024 to April 2025, and Steward is also responsible for other costs, including $32 million billed by the lawyers and financial advisers of a court-appointed committee that represents the interests of Steward's junior creditors.

Steward will pursue more than $3 billion in legal claims against a broad range of former insiders, insurers and creditors that received payments from the company while it was collapsing into bankruptcy. Steward estimates that it can fully repay its Chapter 11 expenses if it recovers just 13% of its asserted claims, and Lopez said Wednesday that its strategy seemed feasible.

"You don't need a home run," Lopez said. "You just need a couple of singles, but I don’t know if you’re going to get them."

Lopez acknowledged that Steward's litigation strategy may still fail, and he said he would have "no qualms" about converting the case to a more straightforward Chapter 7 liquidation if the litigation is proceeding too slowly or if Steward's expenses are higher than estimated.

Steward’s largest legal claims are against its former CEO Ralph de la Torre, its former private equity owner Cerberus Capital Management and other insiders that allegedly set the stage for Steward’s downfall by loading it up with debt and taking payments for themselves.

Steward sued de la Torre in Houston bankruptcy court on Tuesday, saying that he and other former insiders "pilfered Steward's assets for their own material gain, while leaving the Company and its hospitals perpetually undercapitalized and insolvent."

De la Torre, through a spokesperson, disputed the allegations of wrongdoing in the lawsuit and said he will vigorously defend himself. Cerberus did not immediately respond to a request for comment, but it has previously said that Steward was in good financial shape when it sold its ownership stake in 2020.

During its bankruptcy, Steward closed some hospitals in Massachusetts and Ohio. It sold some hospitals to outside buyers, and handed others over to Medical Properties Trust which continued as landlord while putting new hospital operators in place.

The case is In re: Steward Health Care System LLC, U.S. Bankruptcy Court for the Southern District of Texas, No. 24-90213.

For Steward: David Cohen, Clifford Carlson, Gabriel Morgan, Stephanie Morrison, Jeffrey Saferstein of Weil, Gotshal & Manges; Ray Schrock of Latham & Watkins

For Massachusetts: Andrew Troop of Pillsbury Winthrop Shaw Pittman

For the Office of the U.S. Trustee: Ha Nguyen of the Office of the U.S. Trustee

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