Judge blocks bankruptcy filing by clinic hit with $75M verdict

A federal judge has blocked an Eastern Iowa medical clinic’s efforts to declare bankruptcy in the wake of a record-setting $75 million malpractice judgment.

U.S. Bankruptcy Judge Anita L. Shodeen has dismissed the bankruptcy case filed late last year by Obstetric and Gynecologic Associates of Iowa City and Coralville, ruling there is evidence the filing was intended to shield the clinic’s insurer from a $12 million policy payout.

In March 2022, a Johnson County jury awarded more than $97.4 million to the family of a boy who sustained serious brain damage during his birth at an Iowa City hospital. The award, believed to be the largest medical malpractice judgment in Iowa history, was later reduced to $75.6 million.

The boy’s parents, Kathleen and Andrew Kromphardt, had sued Obstetric and Gynecologic Associates of Iowa City and Coralville as defendants, along with Dr. Jill Goodman, one of the directors of the clinic.

The Kromphardts contended their son’s brain damage was caused by medical workers’ failure to properly respond to signs the baby was deprived of oxygen in the hours leading up to his birth in August 2018. The boy, now 4, is unable to walk by himself and is largely unable to speak. At trial, the family’s lawyer argued the child will likely need 24-hour care for the rest of his life.

Last October, with the Kromphardts attempting to collect the $75.6 million award in the case, the clinic filed for bankruptcy. The Kromphardts’ attorneys challenged the bankruptcy filing, arguing it was filed in bad faith to avoid payment of the award.

Court records indicate that before the trial, offers were extended by the family’s attorneys to resolve the dispute for the insurance policy limit of $12 million. However, insurer MMIC Inc. apparently refused to negotiate or make any settlement offer to the plaintiffs, which was in direct contradiction to the clinic’s position in the case.

After the verdict, the clinic appealed and requested that a stay be imposed to halt any collection efforts until the appeal could be heard. The Iowa Supreme Court denied that request.

At that point, MMIC reportedly refused again to engage in settlement negotiations, prompting the Kromphardts’ attorney to initiate collection efforts. In October, the sheriff’s office arrived at the clinic to initiate seizure of the business’ assets, and the clinic filed for Chapter 11 bankruptcy to protect its assets and remain in business.

On Jan. 20, the conservator in the bankruptcy case filed a motion with the court, alleging the clinic was acting in bad faith by filing for bankruptcy, arguing it was a litigation tactic to avoid payment of a bond that would secure some of the clinic’s assets.

In March 29 decision dismissing the bankruptcy case, Judge Shodeen expressed concern over “the relationship” between the clinic and MMIC. The judge suggested the insurance company may have given the clinic certain financial favors in return for the clinic filing for bankruptcy as part of an effort to shield MMIC from having to make a $12 million policy payout.

She noted that MMIC paid fees to the clinic’s bankruptcy professionals and offered the clinic favorable terms on its insurance coverage when no one else would. In addition, the judge stated, MMIC had offered to extend credit to the clinic.

“A question arises about whether the bankruptcy was motivated by a proper purpose or to obtain financial advantages from MMIC in exchange for filing bankruptcy to attempt to protect it from making payment under the policy,” Shodeen stated in her decision.

The clinic, meanwhile, had supplied “little evidence to establish its good faith” in the matter, Shodeen added.

On Tuesday, the clinic filed an appeal of Shodeen’s decision in the case.

This article first appeared in the Iowa Capital Dispatch.