Judge calls hearing as attorneys fight for half the Mercy sale proceeds

With the bankruptcy case of Iowa City’s only community hospital winding down — and tens of millions in liquidated assets already distributed to bondholders — attorneys, consultants, and other professionals still are fighting for their cut, with fee applications topping $13 million.

Nearly 40 percent of that total, $5.1 million, if approved would go to Chicago-based law firm McDermott Will & Emery. When combined with the $4.8 million billed by Mercy’s interim managing operator, New York-based ToneyKorf Partners, LLC, those two firms account for three-fourths of the fees.

“The sale price of the major asset in this case, the hospital, was $26 million,” according to a “Liquidating Trust Oversight Committee” motion asking a judge not to approve all $13 million in fees, which it notes is “more than half of what was recovered.”

“There are precious few assets in the trust to be marshaled on behalf of creditors in this case,” according to the motion.

Although U.S. Bankruptcy Judge Thad Collins already signed off on some fee applications — including several he approved inadvertently and might pull back — on Thursday he told attorneys he wanted to hold one, if not multiple, hearings on the fees.

Collins said he wants to discuss on the record fees that have incited objections and those that haven’t — but repeatedly stressed his goal isn’t to “head hunt” attorney fees.

“I'm not out head-hunting fees,” he said. “Honestly, the opposite is true. I believe the lawyers should get paid for their work.”

In a status report submitted to the court last week, Mercy’s liquidation trustee Dan Childers said the trust has distributed $20.4 million to secured bondholders, $733,333 to pensioners, and is holding $1.5 million in reserve for unsecured creditors “for future distributions.”

Heading into its bankruptcy in August 2023, Mercy owed its secured bondholders more than $62.8; its unsecured creditors $38.4 million; and its former employees due pension distributions between $8 million and $30 million.

$1,975 an hour

Addressing the notion that so much of the proceeds of the sale of Iowa City’s 150-year-old hospital could be headed out of state, pensioners this week filed a motion to curtail fees requested by McDermott, Will & Emery — which involved 28 of its attorneys in this case, also billing for work done by one paralegal and nine other research- and data analyst-type professionals.

“McDermott Will & Emery’s fee applications in this case are replete with duplication of efforts, with multiple attorneys billing to review the same document, attorneys reviewing one another’s work, interoffice emails and conferences, as well as multiple partners preparing for and attending hearings (even in cases where only one attorney from McDermott Will & Emery appeared in court),” according to the pensioners. “McDermott Will & Emery attorneys frequently billed for simply listening to in court proceedings on the phone.”

Among its millions in fees, McDermott billed Mercy $245,042 for the time it spent applying for compensation and addressing objections to its fee applications, which were filed repeatedly by the U.S. trustee against the Chicago firm.

The U.S. bankruptcy trustee presented many of the same objections pensioners made this week, including exorbitant rates. Of the 28 McDermott attorneys on the case, 18 charged Mercy more than $1,000 an hour — with three partners making $1,850 to $1,975 an hour.

Partner Dan Simon, charging $1,450 an hour, billed $1.2 million for his about 10 months on the case. Partner Felicia Perlman, at $1,850 an hour, billed just under $1 million for her 522 hours on the case.

Given McDermott is involved in many other corporate reorganizations and insolvency matters nationally, records show Simon — for example — billed $1,285 an hour earlier this year for his work with Envistacom. Perlman, for a Supply Source Enterprises, Inc. case she worked on this year, billed $1,995 an hour, according to court records.

But, pensioners argued, “the hourly rates charged by McDermott Will and Emery are far outside the range charged by practitioners in this district.”

“Standard rates for practitioners here top out at roughly $500 an hour, less than half the rate of several McDermott Will and Emery associates and roughly a quarter of the McDermott Will and Emery partner billing at the highest rate.”

‘At least try again’

Although Judge Collins aired support for attorneys and paying them — noting, “I’m a believer in people doing a good job in this case, and I’m not going to change my view of that” — he also characterized the U.S. trustee, which has objected to every McDermott fee application, as being “very interested, very tuned in, very adept at handling these issues, very engaged.”

“And I’m all ears when they’re talking about these things,” he said. “They tend to be reasonable with lawyers on fees and work with them.”

Regarding trustee objections to both McDermott and Cedar Rapids-based Nyemaster Goode applications, attorney Roy Leaf said a resolution could be brewing — or not.

“We will at least try again with the U.S. trustee to reach a resolution,” Leaf said. “I understand McDermott has also reached out to the U.S. trustee’s office and tried to reach a resolution. But it sounds like a resolution may not be coming. And I'm not confident on our side either that there'll be a resolution.”

Among the fee applications the judge inadvertently signed too soon was one for $1.2 million to New Jersey-based Sills Cummis & Gross, P.C., which represented the unsecured creditors.

“From my firm's perspective, we took a substantial discount, as reflected in the application; we took another further substantial discount based upon the robust discussions I had,” Sills Cummis attorney Andrew Sherman said Wednesday. “And when I had those discussions, I relied on the fact that there wasn't going to be further litigation. The idea was to avoid this discussion. But obviously your honor has the last word, which obviously we respect. So we would only ask your honor to leave your orders in place. We relied on them.”

Judge Collins said, “This is not what I would call litigation.” And, calling it a good sign that the U.S. trustee hasn’t objected to his fees, Collins said, “There’s no big red flag here.”

Vanessa Miller covers higher education for The Gazette.

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