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In a dramatic turn inside a Texas courtroom, U.S. Bankruptcy Judge Stacey G. Jernigan on Friday approved a $45 million settlement between Yale New Haven Health Services Corp. and Prospect Medical Holdings Inc., bringing closure to a tense legal brawl over a failed $435 million sale of three Connecticut hospitals. The pact is a key victory for Prospect as it inches toward an exit from Chapter 11 bankruptcy.

The deal, announced last month, will see Yale New Haven Health—a nonprofit system tied to the Yale School of Medicine—pay the hefty sum while both parties agree to mutual releases, effectively burying months of litigation that loomed over the company’s restructuring.

Judge Clears Path for Hospital Sales and Bankruptcy Plan

Judge Jernigan’s approval gives Prospect Medical breathing room to resume efforts to sell off assets and push for confirmation of its Chapter 11 plan. “Beyond the obvious financial gain, it benefits the estate and the process in many other ways,” said William E. Curtin of Sidley Austin LLP, representing Prospect.

The court also greenlit Prospect’s request to abandon two Pennsylvania hospitals that have been shuttered since spring, allowing them to move forward with a new auction. Maegan Quejada, also of Sidley, said bids for the facilities—Springfield Hospital and Crozer-Chester Medical Center, both in Delaware County—were set to begin at $3 million and $7 million respectively, totaling $10 million in opening offers.

Tax Deals and Auction Strategy

Quejada told the court that Prospect’s recent deal with Pennsylvania tax authorities mirrors an earlier summer agreement tied to two other closed hospitals. These accords allow the state to retain unsecured claims, a move that clears a smoother path for sales and could attract stronger bids. “We think we’ll be able to get those deals consummated because of this deal,” Quejada said, crediting the Yale settlement as a catalyst for renewed momentum.

Financial Turmoil and the Road Out of Chapter 11

Once a multi-state hospital operator, Prospect Medical, based in California, filed for bankruptcy in January, reporting more than $1 billion in liabilities. The company blamed its downfall on a brutal mix of pandemic pressures, surging operational costs, shrinking government reimbursements, and a crippling cyberattack that disrupted operations.

At the time of filing, Prospect managed 16 hospitals across California, Connecticut, Rhode Island, and Pennsylvania. The court will reconvene in early November to consider confirming a Chapter 11 plan that would wind down the company and distribute sale proceeds to creditors.