Mercy reverses auction results; declares University of Iowa winner

IOWA CITY — The tumultuous and twisting bankruptcy case of Mercy Iowa City took another stunning turn Friday when the hospital revealed it had reopened its assets auction and changed its mind about who won the bidding — declaring the University of Iowa as having made the “higher or otherwise better” offer instead of its largest bondholder, Preston Hollow Community Capital.

In a bankruptcy filing, Mercy declared the UI “the winning bidder” — due, in part, to a “material disagreement” with Preston Hollow, which had topped the university’s final $28 million bid with a $29 million offer at the close of the auction Oct. 10.

UI President Barbara Wilson and UI Vice President for Medical Affairs Denise Jamieson in a letter to campus Friday said the about-face "unfolded quickly“ after Preston Hollow ”determined its previously selected bid was not financially viable.“

“Mercy agreed with the bondholder’s conclusion and, as a result, declared the university’s bid as the winning offer,” according to Wilson and Jamieson.

Although over two weeks have passed since it declared Preston Hollow the winner, Mercy had not yet asked the court to set a hearing finalizing the sale — as attorneys grappled over details about financing the transition to new ownership.

“In the days that followed the conclusion of the auction, and prior to a sale hearing, a material disagreement arose between (Mercy) and (unsecured creditors), on the one hand, and the bondholders on the other hand,” according to Friday’s filing. “As a result of this material disagreement, (Mercy) after consulting with the (unsecured creditors), believed that the final bid submitted by the bondholders was not higher or otherwise better than the final bid submitted by the State of Iowa’s University of Iowa.”

A transcript of the auction shows the bondholder insisted that all available Mercy resources — including money from its nonprofit foundation — should help cover operating losses until the closing. Mercy disagreed and, due to ongoing discord about available resources to fund the mounting losses, Mercy stood by its new declaration the university had the better bid.

In announcing UI its new winner, Mercy asked the bankruptcy court to set a sale hearing for Nov. 6 — allowing for a swift transition to university ownership.

Preston Hollow, based in Texas, said in a statement that it has been working for over five years “to ensure that residents and families living in Johnson County can continue accessing critical health care services through a community-based hospital.”

“In the coming days, the bankruptcy court will rule on this matter,” its statement said. “In the meantime, our team will continue to evaluate the process to ensure the hospital remains viable long-term and the facility's nurses, doctors, and other staff can continue to deliver high-quality services to patients across the community.”

If a judge approves the sale to the UI, the university “plans to conduct an in-depth analysis of the health care needs of the Iowa City community before making any modifications to the hospital or its services,” according to a news release from Mercy. The UI also plans to “make employment offers to substantially all Mercy employees.”

In a statement, Mercy Chair and Chief Executive Officer Tom Clancy said the 150-year-old community hospital’s board of directors and management “are confident that the sale of Mercy Iowa City to the University of Iowa is the best path forward for our patients, physicians, staff, and community.”

Mark Toney — who, with New York-based ToneyKorf Partners LLC, was hired as Mercy’s chief restructuring officer earlier this year — thanked the university Friday for its “graciousness” during the “unusual process.”

How we got here

Preston Hollow and master trustee Computershare — in partnership with Los Angeles-based American Healthcare Systems — outbid the university’s final $28 million offer on Oct. 10 after the auction had been continued from its first day on Oct. 4.

As part of the hospital’s Aug. 7 Chapter 11 bankruptcy petition, the university served as “stalking horse bidder” and offered a starting bid of $20 million, which was low given Mercy’s own financial statements indicating its net worth is $96.4 million.

During the auction’s first day, Preston Hollow and its partners made a counteroffer of $27 million and UI attorneys declined to top it. That compelled Mercy attorneys to continue the auction until Oct. 10, when the university did increase its offer — now bidding $28 million and a vow of $25 million infrastructure investments over five years.

Preston Hollow, also committing to make additional investments in Mercy as part of its takeover, increased its base bid to $29 million — to which the university did not respond — landing it the “winning” label as the “highest and otherwise best bid.”

Backroom bickering

Bickering has plagued these proceedings from the start, with Mercy — at various points — threatening to sue Preston Hollow for driving it toward bankruptcy in the first place, accusing the bondholder of publicizing confidential financial information.

Preston Hollow, on the other hand, accused the UI of improper bid tactics and Mercy of stalling in an attempt to heave more of the operating loss burden onto its shoulders.

Preston Hollow and Computershare were able to bid by tapping some of the more than $62 million that Mercy owes them — meaning they weren’t going to be handing over $29 million, like the university would with its offer.

Those details are key as attorneys who are due millions — including several at rates nearing or topping $1,000 an hour — angled behind the scenes for dwindling Mercy resources, needing to be distributed not just among lawyers but secured creditors, hundreds of unsecured creditors and pensioners.

Preston Hollow recently asked a judge to force Mercy to move forward with the sale — following its auction win — and to do so acknowledging millions from its nonprofit foundation can and will be used toward operating expenses and losses.

“Needless to say, this disagreement necessarily meant that the value of the final bid from Preston Hollow was materially different than what (Mercy) and the (unsecured creditors) determined at the auction,” Mercy attorney Dan Simon said, according to a transcript. The university made clear it did not intend to use foundation money to cover operating costs upon transition.

“The university's last bid on the record did not include any foundation money,” UI attorney David Gordon said, according to a transcript. “With respect to cash, I do believe we assumed that (Mercy) would use their cash on hand to fund their operations and that we would make up the difference between operating revenues and losses.”

Gordon said the university — at a purchase price of $28 million — anticipates closing the deal on or before Jan. 31.

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