Judge confirms Mercy Iowa City liquidation plan, denies MercyOne objections

IOWA CITY — A federal bankruptcy judge has confirmed a Chapter 11 plan of liquidation for the former Mercy Iowa City hospital, despite push back from its former managing partner MercyOne — which now, under the plan, remains exposed to future lawsuits.

“After weighing all the factors and circumstances of this case, the court finds that (representatives for Mercy Iowa City) have met their burden … by a preponderance of the evidence,” Chief Bankruptcy Judge Thad Collins wrote Friday in his order. “MercyOne’s objection that the releases are unlawful and should not be included here is overruled.”

MercyOne gave several reasons for objecting to the liquidation plan — including that the plan wrongfully released from liability, and thus potential litigation, a broad swath of entities and individuals involved in the monthslong bankruptcy battle. Those released include Mercy Hospital, its pensioners, creditors, its foundation and the bondholders that Mercy Iowa City previously threatened to sue.

But the plan explicitly does not release from potential litigation MercyOne, a West Des Moines-based health care system that for an annual $2 million fee served as Mercy Iowa City’s managing partner from 2016 to just before its bankruptcy in 2023.

A Mercy Iowa City attorney told the judge that exclusion wasn’t because his team hadn’t tried to hash out the two sides’ differences.

“We're sitting here today on the precipice of confirming a plan, where all of those major stakeholders agree and support — and that is no small task,” Mercy Iowa City attorney Dan Simon said during a hearing in May, highlighting key compromises and concessions all the other supporting players made. “We tried to do the same with MercyOne. … We tried to resolve everything. We never got a response.”

Simon told the judge, “There are allegations against MercyOne. They can be brought. They can be settled. MercyOne has the ability to defend itself, to the extent that they are brought.”

That, attorneys said, was why MercyOne fought against confirmation of the plan. And that was where Judge Collins focused his attention.

“MercyOne focuses its entire objection on the release of parties,” Collins wrote. “The only real issue remaining, and the only one truly argued at the confirmation hearing, is whether (Mercy Iowa City’s) release of other parties to this case is warranted.”

‘Near-unanimous consent’

To MercyOne’s assertion that Mercy Iowa City didn’t need to include the releases to garner the support it got, Collins disagreed.

“Particularly persuasive is the fact that these releases were integral to the consensual nature of the plan and necessary to avoid the prospect of immense and complex litigation absent the releases,” Collins wrote.

Many of the supportive parties had to give up the prospect of recovering hundreds of thousands to millions of dollars by agreeing to the releases and saving Mercy Iowa City time and money on more attorney battles.

“The evidence and undisputed arguments … show the releases were critical to achieving the near-unanimous consent (other than MercyOne) to the plan and its confirmation,” Collins wrote. “Multiple major constituents, including most notably the bondholders and the pensioners, explicitly noted that their support of the plan was dependent on (Mercy Iowa City’s) inclusion of the released parties.”

That the plan had such “overwhelming support” and allowed for all sides to receive at least some distribution from the liquidated assets, Collins said the only remaining issue for him to consider was MercyOne’s assertion the plan was unfair in that it might allow entities and individuals to escape potential liability.

“The court rejects this argument as well,” he wrote. “The formation of this plan has been the result of extensive compromise and settlement talks between the key parties in this case, including the United States Trustee, the Unsecured Creditors Committee, the pensioners, and the bondholders, and various other constituents.”

MercyOne failed to show the plan was unreasonable or irrational, according to Collins.

“MercyOne has offered no such evidence or argument,” he wrote. “It asserted only that the possibility of greater recovery against released parties could have been explored in more detail before (Mercy Iowa City) agreed to the releases. That is not enough.”

In fact, Collins said in his order, evidence supports the opposite — that Mercy Iowa City’s plan was rational and reasonable, especially given discord at the start of the case.

“On Aug. 8, 2023, when the court held its ‘first day motions’ hearing in this case, the animosity between (Mercy Iowa City) and the multiple constituent groups was palpable,” he wrote. “The court urged the parties to work together toward consent, with an eye to the future and a confirmation plan. The parties have done just that.

“The gravity of having a consensual plan presented to the court just a short nine months later — with MercyOne’s objections being the only remaining outlier — is not lost on this court.”

UIHC future

Although several issues remain, the court’s plan confirmation Friday is a substantial step toward closing out the Mercy chapter of the community hospital — now under University of Iowa Health Care ownership and operation.

UIHC in October won a bankruptcy auction for the 194-bed hospital with its $28 million bid and commitment to cover operating losses for a period of time. The university officially took over at the end of January — adding to its ranks 1,000 former Mercy employees and a list of new hospital and clinic facilities.

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