Judge dismisses MercyOne appeal of Mercy Iowa City liquidation plan

A U.S. District Court judge on Monday dismissed MercyOne’s appeal of a liquidation plan for the bankrupt Mercy Iowa City hospital it managed for years — a plan MercyOne opposed, in part, because it left the Des Moines-based health care system exposed to potential lawsuits.

“Even if the court found MercyOne has standing to appeal, the court would still affirm the bankruptcy court’s plan confirmation,” U.S. District Court Chief Judge C.J. Williams wrote in his order, essentially clearing the way for a trust to continue executing a liquidation plan to distribute Mercy Iowa City’s remaining assets to those it owes money.

Since a bankruptcy judge in June 2024 approved a liquidation plan for Mercy Iowa City — which filed for bankruptcy in August 2023 and sold its assets to University of Iowa Health Care for $37.4 million in January 2024 — a trustee has overseen several developments, according to the order.

They include distributing $20.4 million to bondholders and $733,333 to pensioners; selling Mercy’s interest in a senior living facility for $1.7 million; reviewing and disposing of about $4 million in administrative liability claims; trying to sell an unoccupied building in downtown Iowa City; continuing collections of accounts receivable before they go stale; and starting payments of a variety of administrative claims.

As part of the liquidation plan, Mercy Iowa City and a majority of its creditors agreed to release from liability or lawsuits a broad swath of parties across18 categories — from bondholders that Mercy originally accused of accelerating its path toward bankruptcy to unsecured creditors to pensioners, along with current and former directors, officers, employees, financial advisers, attorneys, consultants and other professionals.

The released parties notably exclude MercyOne, which managed Mercy Iowa City during its decline from 2016 to 2023 — charging an increasing management fee that topped $2 million in 2021 and 2022, according to public records.

“There are allegations against MercyOne,” Mercy Iowa City attorney Dan Simon told Thad Collins, chief bankruptcy judge for the Northern District of Iowa, in May 2024. “They can be brought. They can be settled. MercyOne has the ability to defend itself, to the extent that they are brought. That issue is preserved.”

‘Pure speculation’

MercyOne’s appeal targeted the plan’s far-reaching releases, highlighting — among other things — the money Mercy Iowa City could be leaving behind by committing not to sue such a broad range of employees, creditors and bondholders. But Judge Williams wrote that “it is pure speculation whether there are any claims against the (released parties) at all.”

“MercyOne has not identified a single claim that (Mercy Iowa City) released that would have (or even could have) increased its recovery,” according to the judge, who cited case law that “Speculative or hypothetical claims are insufficient to establish standing.”

When the bankruptcy court asked MercyOne previously if it had any evidence of a potential claim against one of the released parties, a MercyOne attorney said, “I don’t have anything I could put, concrete, before you. But I believe there are, probably.”

In the eight months since those comments, according to Williams’ order, MercyOne remains unable to point to a concrete example of a possible claim that could increase its prospect for being paid back the $31,500 claim it’s owed.

“According to MercyOne, they are an impaired creditor, meaning they will not be paid the full amount of their claim,” according to Monday’s order.

To MercyOne’s concern that releasing everyone else from potential litigation could up the risk of it being sued, Williams again rebuffed the argument.

“Under this theory of harm, MercyOne would be the target of litigation because all the other relevant parties have already been released while MercyOne has not,” according to the order. “There is no indication, however, that there are any claims directed at MercyOne that it would not have otherwise faced had the (released parties) not been released.”

‘Overwhelmingly in favor’

Aside from its grievances with the plan, MercyOne also argued the bankruptcy court erred in confirming it at all — an assertion the district court rejected.

Among its reasons for rejection was “the single most important factor” that everyone else involved — from bondholders to creditors to pensioners and the Sisters of Mercy — were “overwhelmingly in favor of confirmation of the plan.”

“There may be several creditors who did not approve of the plan, but that does not somehow cancel out that many creditors did approve of the plan,” according to the order. “The fourth factor considers whether the voting classes ‘overwhelmingly’ voted for the plan. Here, they did.”

In affirming the plan, Judge Williams noted getting agreement seemed unlikely at the outset of the case — given the acrimonious start to the bankruptcy, rife with accusations and threats between Mercy Iowa City and its bondholders, among others.

“Achieving the plan here was unlikely at the outset, but through diligent work and compromise the stakeholders were able to come up with a plan that had near unanimous consent,” he wrote. “To sustain the objection and cause the plan to fail when the plan had garnered such significant support would be unfair.”

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