Sherman/Grayson Hospital, LLC filed for chapter 11 protection on June 23, 2023, in the U.S. Bankruptcy Court for the District of Delaware. The debtor operated Wilson N. Jones Regional Medical Center, a 207-bed acute care hospital in Sherman, Texas, serving Grayson County as the area's only large acute care facility. At the time of filing, the hospital employed approximately 400 people, was losing more than $1 million per month, and had been unable to secure working capital financing from conventional sources.
The debtor pursued a private sale to AHS Sherman, LLC — the only buyer identified as viable after a three-year marketing effort. The court approved the sale in August 2023, and AHS Sherman took operational control on January 1, 2024. Nearly three years after filing, the case remains open due to unresolved professional fee enforcement against the buyer, a contested electronic health records software dispute with Altera Digital Health, and ongoing claims reconciliation.
Sherman/Grayson Hospital, LLC (d/b/a Wilson N. Jones Regional Medical Center)
Court
U.S. Bankruptcy Court, District of Delaware
Case Number
23-10810
Petition Date
June 23, 2023
Judge
Hon. J. Kate Stickles
DIP Facility
$1.125 million multi-draw term loan from MPT of Sherman-Alecto, LLC (landlord/secured creditor) at 8% interest
Claims Agent
Donlin, Recano & Company, Inc.
Case Snapshot
Financial Distress and Pre-Filing Sale Efforts
Wilson N. Jones Regional Medical Center faced sustained operating losses and a liquidity shortage in the years before filing. In 2022, the hospital reported a net loss of $17.9 million on $42.5 million in annual net revenue. For the quarter ending March 31, 2023, the net loss was $2.3 million, and at the time of filing the debtor was losing more than $1 million per month.
The debtor was affiliated with Alecto Healthcare Services Sherman LLC and its parent company, Alecto Healthcare Services LLC. Alecto itself filed for bankruptcy in 2023 after what financial analysts described as approximately $19 million in arguably fraudulent transfers out of its affiliated entities during 2022, including funds transferred from Vista MC East in Illinois to sustain operations at other facilities. The hospital operated under a lease agreement with MPT of Sherman-Alecto, LLC, which owned the real property and improvements. That lease, dated October 31, 2014, carried annual rent of approximately $1.159 million and a term expiring December 31, 2026.
The hospital competed with another large acute care facility in the immediate area and was unable to invest in necessary infrastructure upgrades, including an electronic medical records system overhaul that had contributed to operational disruption. The debtor's secured debt at filing was relatively modest: approximately $1 million in IRS tax liens, $956,000 owed to MPT on unpaid capital reserves and a prepetition advance, $351,812 to Midland States Bank for financed radiology equipment, $93,575 to US Foods on a personal property security interest, and approximately $9,700 to Dell Financial Services on leased computer servers.
Pre-petition marketing. The debtor spent approximately three years attempting to locate a buyer or strategic partner. Bank of America Merrill Lynch was engaged in 2019. Executives held discussions with at least five health systems within 90 miles of the hospital, two single-hospital operators in Texas, and additional parties — all of whom declined to invest or acquire the facility.
Final buyer search. In the nine months before filing, the debtor identified four potential buyer groups. Three were eliminated: one could not provide interim funding, a second required operational scale-downs the debtor could not finance, and a third was unavailable due to other business commitments. Only AHS Sherman, LLC remained as a viable buyer. AHS Sherman was founded by Michael Sarian, a former director of hospital operations at Prime Healthcare — the hospital operator built by Alecto founder Lex Reddy's brother-in-law, Prem Reddy, with backing from Medical Properties Trust.
Judgment creditor pressure. Medley, Inc. had obtained a garnishment action against the debtor. The debtor warned that any disruption to its bank accounts could trigger a 15-day stoppage of Medicare and Medicaid payments, threatening the hospital's primary revenue streams.
DIP Financing and MPT Landlord-Lender Arrangement
Medical Properties Trust's affiliate, MPT of Sherman-Alecto, LLC, served as the DIP lender — the same entity that was the debtor's prepetition landlord and secured creditor. MPT's role as both landlord and lender to distressed hospital operators has drawn scrutiny from financial analysts, who have documented a pattern across MPT's portfolio: multiple hospital tenants — including Pipeline Health, Prospect Medical Systems, Steward Health Care System, and Alecto — filed for bankruptcy or entered receivership while operating in MPT-owned facilities. Analysts have alleged that MPT engaged in rent "round-tripping," in which loans to tenants were used to pay rent back to MPT, and that coverage metrics and tenant profitability were misrepresented to investors.
The DIP financing motion sought approval of a multi-draw term loan facility with a maximum commitment of $1 million (later increased to $1.125 million through a global settlement). Key terms included an 8% annual interest rate paid in kind, a default rate of 2% above the applicable interest rate, and interim authorization of $500,000. The DIP loans carried super-priority administrative expense status and a first-priority security interest in substantially all of the debtor's existing and after-acquired property, subject to certain exclusions for specified avoidance actions. The facility matured at the earliest of August 18, 2023, completion of the acquisition, 30 days after entry of the interim order if no final order had been entered, or acceleration of the DIP note.
Carve-out. The DIP order provided a professional fee carve-out structured in two tranches: $125,000 for fees incurred through the carve-out trigger date and an additional $125,000 for fees incurred after the trigger date, totaling $250,000.
MPT's prepetition bridge. In anticipation of the filing, MPT Sherman extended a $375,000 senior secured term loan to cover prepetition payroll costs. This note was fully repaid from initial DIP loan proceeds.
The court entered the interim DIP order on June 30, 2023, and the corrected final DIP order on August 31, 2023.
Private Sale to AHS Sherman
The asset purchase agreement with AHS Sherman, LLC was executed on June 19, 2023 — four days before the petition date. On July 5, 2023, the debtor filed a motion for private sale of substantially all assets free and clear of all liens under 11 U.S.C. § 363(f). The debtor sought approval without a competitive auction process, citing the three-year marketing effort, the absence of alternative bidders, and the risk that continued operations at $1 million or more in monthly losses would force a shutdown. AHS Sherman was described as a Texas limited liability company whose operators had previously acquired distressed hospitals and was not an insider of the debtor within the meaning of 11 U.S.C. § 101(31).
Interim management. AHS Sherman entered into an interim management agreement effective June 21, 2023 — two days before the petition date — and agreed to fund operations and administrative obligations, including estate professional fees, regardless of whether the final sale closed.
Employee retention. The asset purchase agreement required AHS Sherman to retain all of the debtor's approximately 400 employees.
Altera Digital Health objection. Altera Digital Health Inc. objected to the sale on July 21, 2023, arguing that neither the debtor nor AHS Sherman had provided adequate assurance of future performance for Altera's software license agreements under 11 U.S.C. sections 365(b)(1) and 365(f)(2)(B). Altera noted that the debtor owed unpaid license fees dating to April 2022, that AHS Sherman had not made post-petition payments under the interim management agreement, that an AHS affiliate (AHS-Missouri at South City Hospital) had a history of defaulting on similar Altera agreements, and that the APA failed to propose a cure amount for the outstanding obligations. On August 9, 2023, Altera filed a supplemental objection continuing to press concerns that AHS Sherman planned to purchase the hospital's assets without properly assuming or assigning Altera's master client agreement.
The court entered the sale order on August 29, 2023, authorizing the private sale. The order explicitly provided that Altera's software license and product would not be transferred to AHS Sherman. The sale closed effective January 1, 2024.
Rule 9019 Settlement and GUC Fund
The official committee of unsecured creditors was appointed on July 5, 2023. The committee retained Potter Anderson & Corroon LLP as counsel and RK Consultants LLC as financial advisor. On August 7, 2023, the U.S. Trustee filed an objection to the debtor's counsel retention application, raising concerns regarding the employment of Shulman Bastian Friedman & Bui LLP as bankruptcy counsel. The debtor responded with a supplemental declaration filed the following day.
On October 17, 2023, the debtor filed a Rule 9019 settlement motion to resolve the committee's objections to the sale and DIP financing through a global settlement involving the debtor, the committee, MPT, Alecto Healthcare Services, and AHS Sherman.
GUC Fund. MPT agreed to increase the DIP commitment to $1.125 million, with $250,000 funded into an escrow account at closing for the benefit of general unsecured creditors. The debtor's unsecured debt pool totaled approximately $85 million across roughly 350 creditors.
Structured dismissal. The parties agreed to exit through a structured dismissal rather than conversion to chapter 7, allowing orderly distribution of the GUC Fund and claims reconciliation.
Key settlement provisions. AHS Sherman remained obligated to fund all administrative expenses of the estate, including professional fees and § 503(b)(9) claims. AHS Sherman also agreed not to pursue or transfer chapter 5 avoidance actions. Alecto released all claims against the estate and agreed not to participate in GUC Fund distributions. MPT and related parties received mutual releases from all case-related claims.
Major unsecured claims. The debtor's approximately $85 million in unsecured claims was dominated by CMS/United States with roughly $29.1 million in Medicare overpayment claims and Alecto Healthcare Services with approximately $60.2 million in APA-related claims. Grayson County held an approximately $955,000 secured tax claim, and the Texas Health and Human Services Commission held an approximately $913,000 Medicaid disproportionate share hospital recoupment claim.
Altera Digital Health Contract Dispute
After AHS Sherman took operational control on January 1, 2024, Altera alleged that the buyer continued to use Altera's cloud-hosted electronic health records software without payment — despite the sale order explicitly excluding Altera's software from the transferred assets.
On February 9, 2024, Altera filed a motion to compel payment of $610,496 in administrative expenses and to compel assumption or rejection of its master client agreement. At a February 23, 2024 hearing, Judge Stickles acknowledged that the sale order had carved out Altera's software and noted that no payments had been made under the contract in the two months since closing. The court bifurcated the proceeding, directing the parties to resolve assumption or rejection through evidentiary proceedings before addressing the administrative claim separately. An evidentiary hearing on the Altera contracts was held on February 27, 2024.
AHS Sherman Professional Fee Default and Stipulated Judgment
AHS Sherman's contractual obligation to fund all estate professional fees — a term of both the asset purchase agreement and the global settlement — led to post-sale enforcement proceedings after the buyer stopped paying.
Retained professionals. The debtor retained Shulman Bastian Friedman & Bui LLP as bankruptcy counsel and The Rosner Law Group LLC as Delaware local counsel. The committee retained Potter Anderson & Corroon LLP as counsel and RK Consultants LLC as financial advisor. Klehr Harrison Harvey Branzburg LLP served as Delaware co-counsel to the patient care ombudsman, and Neubert, Pepe & Monteith, P.C. served as PCO counsel.
First interim fee award. The court entered an omnibus order on March 5, 2025, awarding $2.04 million in interim professional fees for the period June 23, 2023 through varying end dates in late 2024:
Payment default and stipulations. AHS Sherman fell behind on professional fee payments beginning in 2024, necessitating multiple court-approved stipulations. The court entered a second stipulation order on July 30, 2024, establishing revised payment terms and providing for pursuit of all available remedies against AHS Sherman upon default. Despite these arrangements, AHS Sherman stopped making payments entirely after June 2025. On December 19, 2025, the debtor issued a formal notice of default.
Stipulated judgment. On January 21, 2026, the debtor filed a certification of counsel submitting a stipulated judgment against AHS Sherman for $405,436, plus pre-judgment interest at 5% per annum and post-judgment interest at the legal rate. The unpaid fees were owed to seven professionals:
Insurance and related litigation. On February 3, 2026, Alecto Healthcare Services LLC filed a motion for relief from the automatic stay to access D&O insurance proceeds from National Union Fire Insurance and RSUI policies. The proceeds would fund defense of former officers in a pending federal action in the Central District of California (United States v. Alecto Healthcare Services LLC). Alecto's own bankruptcy case (Case No. 23-10787, District of Delaware) remains separately administered. A certificate of no objection was filed on February 25, 2026, indicating no opposition to the stay relief motion.
Key Timeline
Date
Event
June 19, 2023
Asset purchase agreement executed with AHS Sherman, LLC
Sale closes; AHS Sherman takes operational control of Wilson N. Jones
February 9, 2024
Altera files motion to compel payment of $610,496 in administrative expenses
February 27, 2024
Evidentiary hearing on Altera contract assumption or rejection
July 30, 2024
Second stipulation order on AHS Sherman payment obligations
March 5, 2025
Omnibus order awards $2.04 million in interim professional fees
September 3, 2025
Patient care ombudsman discharged
December 19, 2025
Debtor issues formal notice of default to AHS Sherman
Frequently Asked Questions
What happened to Wilson N. Jones Regional Medical Center?
Wilson N. Jones Regional Medical Center, a 207-bed hospital in Sherman, Texas, was sold through a chapter 11 private sale to AHS Sherman, LLC. The sale closed on January 1, 2024, with AHS Sherman assuming operational control and retaining all employees. The bankruptcy case remains open due to post-sale enforcement disputes.
Why was there no auction for the hospital?
The debtor conducted a three-year pre-petition marketing effort, engaging Bank of America Merrill Lynch and contacting multiple health systems and operators. Only AHS Sherman emerged as a viable buyer. The court approved the private sale after finding that further marketing was unlikely to produce additional bidders, while the hospital's losses of more than $1 million per month created urgency.
Who is the claims agent for Sherman/Grayson Hospital?
Donlin, Recano & Company, Inc. serves as the claims and noticing agent. The firm maintains the official claims register and distributes case notifications to creditors and parties in interest.
What is the status of the AHS Sherman professional fee default?
A stipulated judgment of $405,436 was filed against AHS Sherman in January 2026 for unpaid estate professional fees. AHS Sherman had not made any payments to professionals since June 2025, despite court-approved payment stipulations.
broader wave of healthcare chapter 11 filings https://gardnermagazine.com/wp-content/uploads/2023/10/Gibbins-Advisors-Healthcare-Bankruptcies-Interim-2023-Report-FINAL-1.pdf
This article was researched and written with AI assistance, using court filings, public records, and news sources. AI-generated content can contain errors. Verify all information against primary sources before relying on it. This is not legal or financial advice. See the disclaimer.