Capital One has taken over Webster Equity Partners’ portfolio company, Discovery Behavioral Health.
Court documents show that Capital One and its financial partner, HPS Investment Partners, found Discovery to be in default on $280 million of debt. Capital One took issue with a change in December 2024 in how Discovery calculated its debt-to-earnings ratio for quarterly financial compliance reports. This culminated in Capital One effectively seizing the company’s assets, dismissing its board and installing its own.
Discovery Behavioral Health 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.
Multiple requests for comment have not been returned. This story may be updated. Barring an undisclosed outside deal, Discovery Behavioral Health has effectively been repossessed by Capital One and HPS Partners — a shocking development for companies in Discovery’s milieu.
Discovery Behavioral Health’s attorneys withdrew its proceedings after the sole hearing in the case, held on Dec. 16. Initially, Discovery sought a temporary restraining order to freeze matters where they were in the lead-up to a potential preliminary injunction. However, during the hearing, the judge rejected Discovery’s arguments. The only restraint the judge would have imposed on the parties would have been to prevent Capital One and the board it installed from commencing a “fire sale” of the company or its assets. That mandate ended with the case’s dismissal.
Part of the company’s argument to the court was the belief that such a sale could happen sooner or later, potentially harming the company. The initial complaint states that Discovery Behavioral Health CEO Tom Britton had a conversation with one of the new Capital One board members, who said they intended to turn the company around for a sale and that the board would retain its own restructuring counsel.
The controversy
In May 2025, Capital One sent a notice of potential default to Discovery Behavioral Health. The notice takes issue with a change Discovery Behavioral Health made in its debt-to-earnings ratio reporting. The short-lived legal fight specifically centers on how to account for expenses associated with closed facilities when calculating the debt-earnings ratio. Capital One argues that without that change, Discovery would have violated those ratios and faced default.Â
Since 2023, Discovery Behavioral Health has shuttered “dozens” of facilities. Despite the closures, Discovery Behavioral Health still had to pay for expenses for those defunct facilities, such as rent and utility expenses. In late 2023, longtime and now-former CEO John Peloquin explained that he and his leadership team were pivoting the company away from a residential care focus toward outpatient care. It had closed as many as 15 of those facilities at that time.Â
“Discovery Behavioral Health continues to incur substantial costs, such as rent and rent-related losses, for these facilities. In the long run, such facility closings cut costs and increase profitability,” the company said in its initial complaint. “The Credit Agreement was not intended to deter Discovery Behavioral Health from cost-cutting that will ultimately make it a stronger and healthier business.”
Discovery also argued that the financial impact of discontinued operations, no matter how accounted for, would drop significantly in the year to come.
The company also described Credit One’s actions as “baseless, unlawful, and bad faith efforts … to take over Discovery Behavioral Health’s business.” It also took issue with Capital One’s initial framing of the May 2025 default notice as “potential.”
Attorneys for Discovery Behavioral Health said that the company did not miss payments.
Other struggles revealed
Discovery Behavioral Health initiated the debt agreements with Capital One and HPS Investment Partners in June 2021. Court documents reveal several amendments to the agreement that waived specific defaults and adjusted the debt’s financial guardrails, including favorable adjustments to its maximum debt-to-earnings ratio.
The first amendment to the agreement, added in Aug. 2022, increased the amount of one type of debt from $25 million to $30 million.
The second amendment, added in May 2024, waived the following default events:
— Violating the terms of the maximum debt-to-earnings ratio for the fourth quarter of 2023
— Failing to deliver financial reports on time
— Failing to report earnouts related to a deal with Memorial Hermann
— Failing to deliver its compliance report for the first quarter of 2024
It also retroactively increased the permitted debt-to-earnings ratio from the third quarter of 2023 to the fourth quarter of 2024. The ratio from then on was set to 6.63 to 1.
After the May 2025 notice of potential default, Capital One and Discovery Behavioral Health discussed further amendments to the credit agreement. The impetus on Capital One’s part was the assurance from Webster Equity Partners that it would sell Discovery Behavioral Health’s outpatient care division — Discovery Medical Services — and use the proceeds to help resolve the dispute.
In October, Capital One and Discovery Behavioral Health worked on documenting the settlement in an amendment to the credit agreement. However, on Oct. 13, Capital “learned on Oct. 13, 2025, that the company and its sponsor were no longer consummating the sale transaction or executing the amendment to the credit agreement documenting the proposed settlement.”