Mercy Iowa City accuses bondholder of ‘deceitful tactics’ in trying to serve papers

IOWA CITY — The day after a judge said Mercy Iowa City had not been properly served with a legal petition asking the court to appoint a receiver to take control of the hospital in “financial free fall” — compelling her to deny the request for the time being — a Mercy employee ran into a stranger at the drinking fountain.

Elizabeth Peak, who had worked at Mercy Iowa City as a “health information management” technician for only eight months, was finishing her lunch and refilling her water when a woman entered the medical records area carrying a bundle of papers bound by a rubber band, according to an affidavit.

“I asked her if I could help her with anything,” Peak said in the affidavit, filed Thursday in Johnson County District Court. “She had been upstairs and was trying to deliver some records. She indicated she had been directed down to the medical records department.”

The woman asked for Peak’s name and title and left the documents with her — leaving Peak to assume she was accepting just medical records — “not accepting service of process on behalf of Mercy.”

“I was surprised because they were not medical records,” she said in the affidavit, noting, “I am not a former or current corporate officer of Mercy. I am not Mercy’s registered agent.”

In asking the court to dismiss the demand that a receiver take control of Mercy — for a second time in the under two weeks since investor Preston Hollow Community Capital and master trustee Computershare Trust petitioned the court July 24 — hospital attorneys Thursday accused the plaintiffs of “insufficient service following deceptive and improper actions.”

“Plaintiffs’ agent falsely and deceptively represented to Ms. Peak that she was being given medical records,” according to Mercy’s second motion to dismiss the case, adding that a process server then filed an affidavit “that falsely stated that Ms. Peak ‘confirmed she was authorized to accept the documents.’”

“Plaintiffs’ false representations to Ms. Peak and to this court and its deceitful tactics in obtaining purported ‘service’ in this case are unsurprising in light of their disingenuous, dangerous, and improper actions to date in this action,” Mercy’s attorneys wrote.

Until plaintiffs Preston Hollow and Computershare — accusing Mercy of breaching contracts connected with $63 million it borrowed via publicly-issued bonds — can figure out how to properly serve the petition, the hospital said it will continue to “protect its rights, its employees, operations and patients.”

Mercy, in seeking dismissal, hasn’t yet replied to the bondholders’ accusations of contract breaches, default and financial distress. But, on Thursday, its attorneys told the court they plan to do so — should the case continue — with a “fulsome answer, affirmative defenses, and evidentiary resistances to the request for a receiver.”

‘Cash horizon event’

Computershare and Preston Hollow last week laid out their argument for a court-appointed receiver — which they updated Tuesday — by arguing Mercy’s liquidity has dropped about $40 million, or 52 percent, over the last nine months.

It’s burning about $2.6 million in cash a month, according to the petition, reporting Mercy projects its liquidity will dwindle to under $5 million by September, which the petitioners argue is “a level insufficient to maintain ongoing operations.”

In documents the petitioners made public and that Mercy subsequently has asked the court to seal — arguing they’re proprietary and not public — cash flow projections show Mercy was at $18.4 million in June and forecasts dropping to $4.8 million in September.

By October, according to documents the petitioners made public, Mercy’s cash flow projections show a drop to $1.2 million.

“Projections indicate cash horizon event absent additional liquidity measures will occur in the mid- to late-October time frame,” according to those internal Mercy documents “for the week ending July 14, 2023.”

In asking the court for a receiver, Preston Hollow accused Mercy of having “no plan or strategy to stem or reverse” operating losses — even as the bondholder has “implored the borrower’s board and management for several months to formulate a financial and operational turnaround plan for the hospital before it falls off the financial cliff.”

Its specific demands include:

In countering Mercy’s motion to dismiss, the bondholder accused Mercy of trying to stall proceedings and “sling mud” at the petitioners for “taking sensible action to preserve the hospital’s operations when the borrower has failed to act."

Administrative changes

Mercy President and Chief Executive Officer Tom Clancy this week notified providers of some administrative changes within the Mercy system, including the resignation of Chief Medical Officer Craig Huston “to pursue other career options” — including returning to his original practice in emergency medicine.

Fred Frank, who joined Mercy Iowa City in 2021 and serves as medical director of behavioral health, will take over as chief medical officer over the next two weeks.

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