Most of Mercy Iowa City’s bankruptcy dissolution earmarked for bondholders

• A bankrupt Mercy Iowa City, as of January, projected between $63 million and $79 million available to distribute to those it owes money.
• Most is slated for bondholders -- who could get 96 percent of their nearly $63 million claim.
• Unsecured creditors, including pensioners, are expected to get 8 to 10 percent of the money they're due -- or $.8 to $.10 on the dollar.
• An objection requests the bondholder claim be downgraded.
• An amended liquidation plan treats pensioners and the rest of the unsecured creditors equally.

IOWA CITY — Facing objections from pensioners and other entities owed millions in “unsecured” claims, a bankrupt Mercy Iowa City — with attorneys burning through thousands by the hour — have negotiated a proposal for how to distribute the hospital’s limited resources.

The proposed Chapter 11 liquidation plan — filed with the bankruptcy court Friday after much behind-the-scenes posturing — includes a “liquidation analysis” showing Mercy projected between $62.7 and $78.6 million available as of the end of January to pay those it owes money.

That “net cash available for distribution” includes $26.7 million in estimated proceeds from a $28 million sale to the University of Iowa — which has continued to operate the former Mercy Hospital as its new UI Health Care downtown campus.

It also includes Mercy’s $15 million in cash and cash equivalents, but subtracts an estimated $3 million for attorney fees in 2024 alone — with millions more in attorneys fees still pending objection from the acting U.S. trustee overseeing the case.

Bondholder Preston Hollow Community Capital and master trustee Computershare — which Mercy blamed for its bankruptcy, citing their “destructive behavior” late last summer to publicly out its financial woes — have filed a “secured” claim for $62.8 million of the available resources, inclusive of attorney fees.

The liquidation plan indicates Preston Hollow and Computershare could recoup up to 96 percent of that claim, while a group of hundreds of businesses and other entities that have filed a combined $38.4 million in unsecured claims could get just 8 to 10 percent of their money due, documents show — or 8 to 10 cents on the dollar.

Additionally, former Mercy employees who participated in its nearly 50-year-old pension plan before the hospital froze new participation in 2017 — and who have filed claims worth $21.5 million in retirement funds — also could recoup just 8 to 10 percent.

As of June 30, 2023, actuaries estimated the pension plan was underfunded — reporting $117.5 million in assets and $141.1 million in long-term liabilities. Language in the proposal seeking court approval notes, “Mercy Hospital reserves the right to change or discontinue the pension plan at any time.”

Objections

In response to a first version of Mercy’s liquidation plan proposed at the end of February, several groups filed objections — including the committee of unsecured creditors, Mercy’s former managing partner MercyOne of Des Moines and the acting U.S. trustee monitoring the case.

“The plan is fatally flawed and patently unconfirmable on its face,” according to an objection from the unsecured creditors — one of four filed March 25. “It would therefore be a colossal waste of time and estate resources for the court to approve the disclosure statement and permit (Mercy) to solicit acceptances of and pursue a hopeless attempt at confirmation of the plan.”

Among the creditors’ complaints were accusations Mercy through its plan “improperly” favored Preston Hollow and Computershare by assuming their $62 million claim was “secured” and by limiting options of those with unsecured claims.

“The plan may not … eviscerate the committee’s challenge rights,” according to the objection. “And any and all claims against (Mercy’s) current and former directors and officers, especially those based on prepetition acts or omissions, must be preserved for the benefit of (Mercy’s) estates and creditors.”

The plan, according to the unsecured creditors, also “discriminates unfairly in its disparate treatment of pension claims and general unsecured claims by providing the pension claims with an additional $250,000 of recoveries.”

The plan, according to the objection, “fails to provide any explanation for (its) disparate treatment of pension claims and general unsecured claims, although they are each general unsecured claims that are equal in priority under the Bankruptcy Code.”

Plus, the creditors want more information about the backroom discussions that resulted in the proposal — especially given the discord at the start of the case between the two now-collaborators, the bankrupt hospital and its bondholder and trustee.

“The disclosure statement lacks sufficient details regarding the terms of the plan support agreement and its negotiation,” according to the objection. “Creditors are entitled to better understand the nature and origin of the plan support agreement before voting on the plan.”

Secured?

Creditors argue the $62 million claim from Preston Hollow and Computershare should be downgraded from its secured status because the bondholders “breached a confidentiality agreement” with Mercy — “causing damage to Mercy Hospital’s reputation and business and significant and negative destruction of value that harmed all of (Mercy’s) stakeholders.”

In making this assertion, the unsecured creditors committee used against Mercy an argument the hospital first posited against Preston Hollow and Computershare — with which it is now collaborating on a liquidation deal.

In an August declaration from Mercy’s Chief Restructuring Officer Mark Toney, he accused the bondholder of blanketing the media, Mercy’s contractors and elected officials “with false and disparaging statements about Mercy Hospital and its board of directors.”

“It is uncontroverted that the careless and callous actions taken by Preston Hollow jeopardized the health and well-being of Mercy Hospital’s patients, the viability of Mercy Hospital’s future, and damaged the organization’s reputation, all resulting in significant and negative destruction of value for all of Mercy Hospital’s stakeholders (including Preston Hollow).”

The unsecured creditors committee in March, leapfrogging off Mercy’s own accusations, sought to downgrade the bondholder and master trustee’s secured claim through “equitable subordination” due to “Preston Hollow’s engaging in egregious, gross, and inequitable conduct by spreading false statements and disparaging remarks about Mercy Hospital, its board, and its management team, and publicly disclosing and disseminating confidential information in breach of the confidentiality agreement, resulting in injury and damages to (Mercy) and conferring an unfair advantage on Preston Hollow.”

Amendments

Following those objections, Mercy late last week filed a revised liquidation plan including concessions — like a cap on the amount bondholders can pay attorneys from Mercy’s estate and a caveat ensuring proceeds from any lawsuits, including claims involving the underfunded pension plan, will be split 40 percent to the bondholders and 60 percent to the liquidation trust, through which creditor distributions can be made.

The plan designated $26.2 million of the UI sale proceeds would go to the bondholders, representing their initial cut of recoveries. And a bankruptcy judge Tuesday approved that distribution — with the unsecured creditors committee “having withdrawn its objection.”

“As soon as practicable following the entry of this order, (Mercy) shall remit sale proceeds in the amount of $26.2 million to the master trustee for the benefit of the bondholders.”

As for pensioners, in addition to an earmarked $250,000, the liquidation plan designates an “advance distribution” that has yet to be negotiated for that group — although it will be no bigger of a final recovery percentage than the rest of the general unsecured creditors get.

A final hearing where a judge will hear the liquidation plan is set for May 16.

  Buy Photo

Comments: (319) 339-3158; vanessa.miller@thegazette.com