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The short answer: lenders won, the court declined to intervene, HPS now owns the company
Capital One and HPS Investment Partners took operational control of Discovery Behavioral Health in December 2025, a New York judge declined to block them, and by June 2026 HPS had converted its debt position into majority ownership. Justice Anar Rathod Patel of the New York County Supreme Court refused to grant a temporary restraining order beyond restraining a fire sale of assets. Discovery filed a notice of discontinuance six days after filing its complaint. Directors chosen by the lenders replaced the board.
That is the version every sponsor-backed operator needs to internalize before reading anything else.
The longer version starts on December 15, 2025, when Goodwin Procter filed Discovery Behavioral Health, Inc. V. Capital One, National Association, et al., Index No. 656437/2025, in the Commercial Division of New York County Supreme Court. The complaint sought to halt an alleged unlawful takeover of the company’s 130-plus behavioral health programs. Court documents show that Capital One and its financial partner, HPS Investment Partners, found Discovery to be in default on $280 million of debt, and that Discovery filed emergency motions in New York state court on Dec. 15, 2025, only to withdraw its efforts to block the takeover six days later on Dec. 21.
Then the next shoe dropped. On June 2, 2026, Discovery announced that, upon regulatory approval, investment funds managed by HPS Investment Partners would assume majority ownership in exchange for a substantial reduction of DBH’s debt obligations, and that the company had appointed Pete Clarke as CEO and a new Board of Directors. A debt-for-equity endgame. Not a court reversal.
Inside the alleged default: covenant math, not a missed payment
This was not a missed payment. Discovery’s December 2025 complaint stated the company had always complied with the Financial Covenant and had sent quarterly certifications attesting to compliance. The fight was over a single line in the covenant math: how to treat rent and utilities on facilities Discovery had already shut down.
Capital One took issue with a change in December 2024 in how Discovery calculated its debt-to-earnings ratio for quarterly financial compliance reports, which culminated in Capital One effectively seizing the company’s assets, dismissing its board and installing its own. Discovery pointed to the credit agreement’s plain text, which it said permitted the deduction. That disagreement escalated into a formal Notice of Potential Default in May 2025. Then it went quiet for six months.
On December 8, 2025, Capital One sent a Notice of Existing Events of Default. Four days later, the board was gone. Court filings describe how, at about 5:53 p.m. On Friday, December 12, 2025, defendants sent (i) a notice purporting to divest Discovery of voting rights over two key subsidiaries and (ii) written stockholder consents replacing the entire boards of both subsidiaries with two individuals whom defendants presumably control.
Here is the takeaway for any sponsor-backed operator: covenant interpretation, not payment performance, can be the decisive trigger. Founders and CFOs in Florida, Tennessee, and Arizona should treat reporting definitions and EBITDA add-back conventions with the same rigor a compliance officer brings to a state licensing survey window. This case is the live demonstration of why. Behavioral Health Business reported that HPS Investment Partners and Capital One seized Discovery Behavioral Health after “a change in debt-to-earnings ratio accounting acted as the final straw of repeated default events.”
Closed facilities, a collapsed sponsor-led sale, and five months that ran out
The strategic backdrop was Discovery’s pivot from residential to outpatient. Since 2023, Discovery had shuttered dozens of facilities and still had to pay rent and utility expenses on those defunct sites. The clinical logic was defensible. The balance sheet logic was not, because long-term leases and utility obligations on closed sites stayed on the books after the doors closed.
Sponsor Webster Equity Partners tried to buy time. A five-month negotiation nearly produced a resolution through the sale of Discovery’s outpatient division, Discovery Medical Services, but the deal collapsed on October 13, 2025. That collapse was the inflection point. Within weeks, the lenders moved.
Chris Larson at Behavioral Health Business framed the significance bluntly, writing that Discovery Behavioral Health has effectively been “repossessed by Capital One and HPS Partners,” describing it as “a shocking development for companies in Discovery’s milieu.” Operators sitting on their third round of forbearance should read that sentence twice.
The macro picture: more deals overall, fewer addiction-treatment deals, tighter credit
The sector is bifurcating. Well-capitalized platforms are absorbing add-ons; the distressed pool keeps growing. Mertz Taggart’s Q4 2025 Behavioral Health M&A Report shows mental health outpaced Addiction Treatment (33 deals for the full year) and I/DD/Autism (36 deals), with mental health alone posting 111 transactions.
The structural pull is real. HRSA’s State of the Behavioral Health Workforce, 2025 report states that “As of December 2, 2025, 40% (137 million) of the U.S. Population lives in a Mental Health Professional Shortage Area.” Demand is not the problem. Capital structure and covenant discipline are.
Lenders are behaving accordingly. Kevin Taggart noted that lenders are “slowing down processes” and “demanding proof that revenue cycles are resilient before releasing funds,” following disruptions from the Change Healthcare cyberattack and ongoing Medicaid uncertainty.
A company carrying $280 million in debt against a contracting addiction-treatment valuation environment has very little margin for error. Behavioral Health Business also noted that “BayMark used to be one of the most acquisitive buyers in the SUD space, but hasn’t bought anything in three-plus years,” which tells you where SUD platform valuations sit right now.
What operators in Florida, Tennessee, Georgia, and Arizona should do this quarter
Three things AHS clients are acting on right now.
- Read the credit agreement’s EBITDA definition again, this quarter. If your CFO is using add-backs the lender did not pre-approve in writing, you are running Discovery’s playbook. The dispute here turned on a single accounting treatment for closed-facility rent and utilities. That was enough to lose a board.
- Treat lease obligations on closed sites as live debt. Operators pivoting from residential to outpatient consistently underestimate how legacy real estate sits on the covenant math for years. If your Florida or Tennessee footprint just contracted, model those obligations into every quarterly compliance certificate.
- Build a real plan B for amendment negotiations. Court documents show the credit agreement had already been amended multiple times, including a May 2024 amendment that waived a Q4 2023 covenant breach and retroactively increased the permitted debt-to-earnings ratio to 6.63 to 1. Repeated covenant amendments are a warning sign, not a solution. When a sponsor-led sale process collapses, the negotiating window closes fast.
Courts are not going to save you once a default is declared. Justice Patel would not even grant a TRO beyond restraining a fire sale. Operators who want to keep control of their companies need to manage covenant compliance with the same discipline they bring to a CARF or Joint Commission survey. The cost of not doing so is in the public record now: a $280 million credit facility, more than 130 programs, and a board replaced by email on a Friday evening.
Frequently asked questions
Did Discovery Behavioral Health actually miss a loan payment?
No. Discovery’s December 2025 complaint in New York County Supreme Court (Index No. 656437/2025) stated the company had always complied with the Financial Covenant and had sent quarterly certifications attesting to compliance. Behavioral Health Business reported that the dispute turned on a December 2024 change in how Discovery calculated its debt-to-earnings ratio, not on payment performance.
What did the New York court actually decide?
Justice Anar Rathod Patel declined to grant a temporary restraining order beyond restraining a fire sale of Discovery’s assets. Discovery filed a notice of discontinuance six days later, on December 21, 2025, ending the case. On June 2, 2026, Discovery announced that HPS Investment Partners would assume majority ownership pending regulatory approval in exchange for a substantial reduction of the company’s debt.
Is this a one-off or a sign of broader behavioral health distress?
Both. Mertz Taggart’s Q4 2025 report shows addiction treatment fell to 33 deals for the year, while mental health posted 111. Heavy debt loads on addiction-heavy platforms, plus forensic diligence on receivables tied to the Change Healthcare disruption and Medicaid uncertainty, make more enforcement actions plausible. HRSA data as of December 2, 2025 show 137 million Americans (40% of the U.S. Population) live in a Mental Health Professional Shortage Area, so demand is not the constraint.
What should sponsor-backed behavioral health operators do this quarter?
Read the credit agreement’s EBITDA definition and any add-back language before the next quarterly compliance certificate. If the finance team is using accounting treatments the lender has not approved in writing, the exposure is the exact failure mode Discovery hit. Treat lease and utility obligations on closed sites as live debt in the covenant math, and remember that repeated covenant amendments are a warning sign, not a solution.
References
- Behavioral Health Business. Capital One Seizes Control of Discovery Behavioral Health After Defaulting on Debt (Feb. 9, 2026)
- Behavioral Health Business. HPS Takes Majority Stake in Discovery Behavioral Health Amid CEO Change (June 2, 2026)
- PR Newswire. Discovery Behavioral Health Announces New Majority Ownership, Leadership Appointments (June 2, 2026)
- UniCourt. Discovery Behavioral Health, Inc. V. Capital One, National Association et al., Index No. 656437/2025 (N.Y. Sup. Ct., N.Y. County)
- Law.com Radar. Discovery Behavioral Health, Inc. V. Capital One, National Association (docket summary)
- Mertz Taggart. Q4 2025 Behavioral Health M&A Report
- HRSA Bureau of Health Workforce. State of the Behavioral Health Workforce, 2025
- Acuity. Discovery Behavioral Health’s $280M Default: The Risk of Leveraged Scaling
- Behavioral Health Business. The SUD M&A Cliff: A Depressed 2026, Smaller Deals and Emerging Opportunities (Jan. 13, 2026)