Tim Tai

A recent bankruptcy court decision to greenlight the sale of Prospect Medical Holdings’ Connecticut hospitals is shifting financial priorities — while also reopening questions about Yale New Haven Health’s place in the ongoing legal saga. 

On March 19, the U.S. Bankruptcy Court for the Northern District of Texas approved a revised settlement between Prospect Medical Holdings and Medical Properties Trust. The Court’s decision allowed Prospect to proceed with a court-supervised auction of its hospital assets, including three Connecticut Hospitals — Waterbury Hospital, Manchester Memorial Hospital and Rockville General Hospital. 

The updated settlement allocates a greater share of sale proceeds to creditors such as the city of Waterbury and the state of Connecticut, which are owed more than $100 million combined. While the auction process is now underway, Yale New Haven Health Services Corporation filed a motion reserving its right under a 2022 asset purchase agreement with Prospect, expressing concern that the bankruptcy sale may impact its legal claims. 

“Each one of these steps is a step in the right direction toward finding a better outcome for the hospitals currently under Prospect Medical,” said Howard Forman, a professor of public health and economics.

Yale New Haven Health, which signed a $435 million agreement to acquire the three Connecticut hospitals in 2022, filed suit in 2024 to terminate the deal, citing Prospect’s alleged failure to meet financial, regulatory and operational obligations. Prospect filed a counterclaim, asserting that Yale had breached the agreement. That litigation, which has been transferred to federal court in Connecticut, remains unresolved.

In its reservation of rights filed on March 14, Yale raised concerns that Prospect’s plan to sell the hospitals through bankruptcy could interfere with the unresolved dispute.

“Notwithstanding the bidding procedures motion, Prospect has continued to take the position that the [Asset Purchase Agreement] remains effective and enforceable,” Yale’s attorneys wrote.

In its filing, Yale also alleged that Prospect failed to meet a wide range of financial, operational and legal obligations outlined in the original agreement — failures that, according to Yale, have severely damaged the hospitals’ ability to provide safe and consistent care. These included missed payments to physicians and vendors, neglect for routine maintenance and safety protocols and a ransomware attack that compromised the personal and medical information of more than 100,000 patients and employees, blaming it on Prospect’s lack of investment in adequate cybersecurity systems.  

Beyond operational concerns, Yale pointed to more than $100 million in unpaid provider taxes owed to the state and at least $12 million in overdue property taxes to the city of Waterbury, which have resulted in state and local agencies placing liens on the hospitals.

“Since signing the APA, the CT Businesses’ financial performance has collapsed,” Yale wrote. “It is therefore unclear whether the Debtors seek to impact YNHH’s rights in the Connecticut Action through the Bidding Procedures Motion.”

Yale argued that Prospect is trying to move forward with a bankruptcy sale while still claiming that the original $435 million APA between the two parties remains valid. This, according to Yale, creates legal confusion — particularly because Prospect has continued to send notices suggesting the Asset Purchase Agreement, or APA, is still in effect, despite now seeking to sell the same hospitals to new buyers through a separate court-supervised process. 

Additionally, Yale emphasized that any dispute over the APA should be decided in Connecticut State Court, as originally agreed by both parties. Yale is concerned that the Texas bankruptcy court process could undermine its ongoing lawsuit, where it claims that Prospect breached the agreement and that Yale is no longer obligated to complete the purchase. With a trial date originally scheduled for April, Yale is urging the court not to let the bankruptcy proceedings interfere with what it views as a nearly resolved case. 

While Yale raised alarms about Prospect’s mismanagement of the hospitals and the potential legal implications of their sale, the bankruptcy process is moving ahead. Prospect, now operating under Chapter 11 protections, is pursuing a structured sale process designed to resolve its financial crisis and transfer hospital ownership. 

In its Feb. 18 motion to the U.S. Bankruptcy Court for the Northern District of Texas, Prospect asked the court to approve a timeline and structure for auctioning its Connecticut hospitals. According to the filing, the sale process will unfold over several weeks. In mid-May, Prospect may select what’s known as a “stalking horse” bidder — a term for the first buyer who sets a minimum price in an auction. Other interested buyers would then have until late May to submit their offers. 

The auction itself is expected in early June, followed by a court hearing to approve the final sale. Medical Properties Trust will have a say in who the buyer is, especially if the hospital properties are still involved in the deal. 

In its motion to the court, Prospect described the auction as “a fulsome sale and marketing process … all while minimizing administrative costs associated with the chapter 11 process.”

The company argued that a well-organized, court-supervised auction would help draw in serious buyers, set fair prices and avoid dragging out the bankruptcy process. The goal, according to Prospect, is to make sure the hospitals are sold quickly and efficiently — protecting their value and reducing the risk of further disruption to patient care or hospital operations.

Forman noted that even though Yale walked away from its earlier deal with Prospect, the bankruptcy sale represents a new opportunity.

“The door was closed to acquiring [the hospitals] from Prospect, but acquiring them from bankruptcy is a different situation,” Forman said. “It’s almost like Prospect is out of the picture.” 

The uncertainty surrounding who will ultimately acquire and operate the hospitals has drawn concern from local officials and public health experts. While several healthcare systems are believed to be monitoring the sale process, the outcome could significantly influence healthcare access for New Haven communities. 

Prospect Medical Holdings is headquartered in Culver City, Calif.