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California-based hospital operator Prospect Medical Holdings Inc., along with several subsidiaries, filed for Chapter 11 bankruptcy in the Northern District of Texas on Saturday, listing over $1 billion in debts. The company plans to move forward with sales of several facilities while focusing on its California operations.

In a press release, the Los Angeles-based company assured that its hospitals in California, Connecticut, Pennsylvania, and Rhode Island would remain open during the restructuring process. Prospect intends to use cash flow from ongoing operations and potential financing, subject to court approval, to pay employee wages, benefits, and vendor obligations.

As part of its restructuring, Prospect is proceeding with the sale of two Rhode Island hospitals to Centurion Foundation Inc. and is working with Pennsylvania authorities to finalize the divestiture of the Crozer-Chester Medical Center near Philadelphia.

"Divesting operations outside California will ensure these facilities receive the necessary financial resources to continue providing essential healthcare services to their communities," said CEO Von Crockett in a statement.

The Chapter 11 petition indicates assets and liabilities ranging between $1 billion and $10 billion, with over 100,000 creditors. However, PHP Holdings LLC, its subsidiaries, and medical groups involved in a planned sale to Astrana Health Inc. are excluded from the bankruptcy filing.

Major unsecured creditors include healthcare IT provider Cerner Corp., the states of California and Connecticut, Compass Group, Stryker, law firm Sheppard Mullin Richter & Hampton LLP, Johnson & Johnson, and the IRS.

The company's operations have faced legal challenges in Connecticut and Pennsylvania, alongside federal scrutiny in Rhode Island. Pennsylvania officials sought court intervention last October to appoint a receiver for the Crozer-Chester Medical Center, accusing Prospect of funneling $457 million to investors from a $1.2 billion sale-leaseback loan secured by hospital real estate.

In Connecticut, Yale New Haven Health filed a lawsuit in May 2023 to withdraw from a $435 million deal to acquire Prospect's hospitals, citing undisclosed financial troubles. Prospect countersued to enforce the agreement.

Connecticut Governor Ned Lamont and Attorney General William Tong have pledged to monitor the bankruptcy closely, with Tong vowing to "actively participate" to safeguard state interests, employees, and patients.

The company did not address its Connecticut operations in the press release announcing the filing.

U.S. Senator Sheldon Whitehouse of Rhode Island criticized Prospect in a January Senate report, alleging the company distributed $645 million in dividends and preferred stock redemptions while defaulting on substantial loans. "Private equity investors have profited at the expense of hospitals and communities, leaving others to deal with the fallout," Whitehouse remarked.

Prospect Medical is represented by Thomas R. Califano of Sidley Austin LLP.

The case is In re: Prospect Medical Holdings Inc., case number 8:25-bk-80002, in the U.S. Bankruptcy Court for the Northern District of Texas.