Legal fees accumulate in Mercy bankruptcy

IOWA CITY — Although attorneys and a U.S. trustee appear to have resolved some issues around “unreasonable” fees associated with Mercy Hospital’s bankruptcy and sale to the University of Iowa, concerns linger over the millions its lawyers want paid while other creditors are left in limbo.

“The amount of fees billed to the estate is unreasonable and should not be approved in their entirety,” Cedar Rapids-based Mary R. Jensen — acting U.S. bankruptcy trustee serving the federal judicial districts for Iowa, Minnesota and the Dakotas — argued in a second objection to another fee request from the Chicago law firm of McDermott Will & Emery.

“Describing itself as having extensive bankruptcy and restructuring experience, as well as experience in virtually all other aspects of law that may arise in these cases, McDermott continues to seek payment of fees multiple times greater than any other party in this case,” Jensen wrote in a Nov. 24 objection.

Among many reasons Jensen gave for objecting was the application’s “vague entries, which do not allow for the reasonableness analysis.” In one case, firm partner Nathan Bull — making $1,410 an hour — billed Mercy for three hours, or $4,230, to “analyze and address various discovery matters.”

She also slammed the firm for billing Mercy for internal meetings among McDermott own attorneys, time spent reviewing each other’s work and for researching case law and bankruptcy law — of which they purport to be experts.

McDermott on many occasions billed for its decision to send multiple attorneys to a court hearing; and it charged Mercy thousands for time spent drafting applications to get paid those thousands.

“The hourly rates charged by McDermott raises the issue of reasonableness for time charges when they are being paid at a rate that reportedly reflects their experience and expertise,” Jensen said of hourly fees over $1,000 for 14 of 23 McDermott attorneys who've billed Mercy for work on the case.

“That expertise should translate into matters being handled efficiently and effectively, not requiring frequent intra-office conferencing and the review and revisions of the same pleadings and each other’s work product by multiple professionals for many of the matters in the case.”

The two McDermott partners with the most involvement on the Mercy bankruptcy — Felicia Perlman and Daniel Simon — are billing $1,850 an hour and $1,450 an hour, respectively. Between Aug. 7, when Mercy filed for Chapter 11 bankruptcy, through Oct. 31, Perlman has billed for nearly 308 hours of work, or $569,800. Over that period, Simon has billed for 370 hours, or $536,790.

“By way of example, on Sept. 22, 2023, J. Knapp billed 1.1 hours for reviewing case law on ‘fiduciary duties/corporate governance issues relating to potential acquisition of certain funds’,” Jensen wrote in her objection, noting Knapp bills $1,450 an hour. “At this hourly rate, no research can be compensable.

“Firms should be setting their rates to be commensurate with the work they produce.”

‘Actual, reasonable, and necessary’

Iowa City’s 150-year-old Mercy Hospital — which had been struggling financially for years before filing for bankruptcy — reported paying the McDermott law firm $3.1 million between Feb. 28 and Aug. 7 for services “related to bankruptcy.” Additionally, McDermott received a retainer before the bankruptcy petition was filed for of $761,951.

Among the expenses it has submitted:

It hasn’t yet submitted to the U.S. Bankruptcy Court an application for November fees.

In total so far, the law firm has accumulated $6.2 million in fees against a bankrupt hospital that — since its Chapter 11 petition through Oct. 31 — had reported a $13.7 million operating loss, despite owing creditors and pensioners tens of millions.

Because the court’s interim compensation order for the case required a 20-percent “holdback of all fees awarded,” according to Jensen, McDermott has asked Mercy for $5.6 million of that $6.2 million total.

In addition to McDermott, Mercy is using a second local law firm based in Cedar Rapids — Nyemaster Goode — and paying millions more in professional fees to restructuring firm ToneyKorf Partners and investment banker H2C Securities.

Nyemaster is billing at much lower rates than McDermott, with its most-involved attorney seeking $295 an hour.

‘Look closely’

Even with the interim holdback, Jensen objected Nov. 6 to McDermott’s August fee request — reporting the firm’s blended hourly rate of $1,273 “far exceeds the local standards” and “shocks the conscience.”

The two sides in the weeks after her first objection agreed to postpone a hearing on the dispute if Mercy was allowed to pay the law firm 70 percent of its calculated fees.

“The parties have also agreed to continue the hearing with respect to the remaining 30 percent of fees for the (McDermott Will & Emery) August fee statement and each reserves all rights,” according to documents McDermott filed advising the court that while they’ve achieved a temporary agreement, the matter isn’t settled.

Two days after noticing that temporary arrangement, Jensen filed another objection — this time to McDermott’s September fees request.

“Noting that every dollar expended on legal fees results in a dollar less that is available for distribution to creditors or use by debtor, the (trustee) continues to look closely at all fee applications filed in these jointly administered cases,” Jensen wrote. “Attorneys are obligated to make a good-faith effort to exclude from a fee request hours that are excessive, redundant, or otherwise unnecessary.”

Reminding the judge he can award less compensation than requested or deny attorney fees altogether, Jensen poked holes in the September application — which she said “lacks transparency."

Although Jensen hasn’t yet filed any objection or support for McDermott’s third fee application for October, that request includes $40,710 for work that five of the attorneys did on just Oct. 4 — the day of the first sale auction that didn’t result in a winning bidder.

For working 8.4 hours that day, Perlman billed $15,540 and Simon billed $13,050 that day for nine hours.

Also billed that month:

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