Yale Settles $435M Hospital Sale Dispute

Yale New Haven Health Services Corp. and Prospect Medical Holdings Inc. have reached a settlement in principle that would resolve a high-stakes $435 million contract dispute over the failed sale of three Connecticut hospitals. The deal, confirmed during a brief status conference before U.S. Bankruptcy Judge Stacey G.C. Jernigan on September 17, brings an end to parallel legal battles in Connecticut state court and bankruptcy proceedings in Texas.

The dispute began in May 2024 when Yale New Haven Health (YNHH), the largest hospital system in Connecticut, filed suit against Prospect Medical Holdings, alleging that the company had failed to disclose critical financial and regulatory issues prior to executing the asset purchase agreement. Prospect, in turn, sued Yale to enforce the sale, resulting in a protracted legal standoff.

Litigation was effectively halted in January 2025 when Prospect filed for Chapter 11 bankruptcy protection in the Northern District of Texas, citing over $1 billion in debt.

The Allegations

At the core of the dispute was Yale’s claim that Prospect misrepresented the true condition of the hospitals intended for sale. Yale asserted that Prospect had concealed serious financial instability, mismanagement, and outstanding regulatory issues—conditions that were not fully disclosed during the negotiation of the $435 million deal.

These allegations led Yale to file suit to exit the purchase agreement, citing material misrepresentation. Prospect retaliated by filing its own complaint seeking to compel the transaction. The state court consolidated both actions in Connecticut Superior Court.

The impasse remained unresolved until the bankruptcy proceedings began, at which point mediation efforts commenced under the oversight of the Texas bankruptcy court.

The Settlement

Attorneys for both parties confirmed to the court that the settlement had been reached during a mediation session held the day before the hearing. Thomas R. Califano of Sidley Austin LLP, representing Prospect, told Judge Jernigan that the parties had negotiated extensively and in good faith, describing the outcome as one where “the numbers started really far apart and got close at the end.”

Stephen M. Pezanosky of Haynes and Boone LLP, counsel for Yale, described the settlement as a straightforward deal involving “a number and releases.” He acknowledged that while “everybody’s pretty satisfied,” no party left the table entirely happy—an outcome often seen as a sign of a balanced resolution.

“That means it’s good,” Judge Jernigan remarked in response. She later added, “Just the fact that you’ve settled is extremely impressive.”

The specific terms of the settlement have not yet been disclosed. An approval motion is expected to be filed next week, detailing the financial and legal provisions of the agreement.

The Bankruptcy Angle

Prospect’s Chapter 11 filing played a critical role in both stalling the litigation and encouraging a negotiated resolution. By invoking bankruptcy protection, Prospect temporarily shielded itself from ongoing court proceedings in Connecticut. The restructuring case, filed in the Northern District of Texas, allowed Prospect to pursue reorganization while also seeking resolution of the asset purchase dispute under judicial supervision.

According to court filings, Prospect reported more than $1 billion in outstanding debt, making the resolution of the hospital sale a key factor in the company’s financial recovery plan. A settlement with Yale will likely enable Prospect to move forward with its reorganization and potentially facilitate additional hospital divestitures.

What’s Next?

While the final details of the settlement have yet to be made public, parties expect to submit the proposed agreement to the court for approval imminently. Once approved, the settlement will terminate both the Connecticut litigation and any related claims within the bankruptcy proceeding.

Dana Marnane, a spokesperson for YNHH, confirmed that the parties had reached “a settlement in principle to resolve our ongoing litigation” following “a productive discussion.”

The outcome of this case may serve as a cautionary tale for hospital acquisition deals involving distressed sellers. In future transactions, buyers may be prompted to conduct even deeper due diligence, particularly when dealing with financially troubled health systems.

The Law Firms Involved

Prospect Medical Holdings is represented by Sidley Austin LLP, including attorneys Thomas R. Califano, Rakhee V. Patel, Maegan Quejada, William E. Curtin, Patrick Venter, and Anne G. Wallice.

Yale New Haven Health Services Corp. is represented by Haynes and Boone LLP and Cravath, Swaine & Moore LLP. Attorneys include Stephen M. Pezanosky, Martha Wyrick, and Kelli Norfleet of Haynes and Boone, along with Paul H. Zumbro and Michael A. Paskin of Cravath.