Mercy Iowa City asks judge to dismiss receivership request, calling it a ‘power grab’

IOWA CITY — A day after a Mercy Iowa City investor asked a Johnson County judge to appoint a receiver to take control of the hospital in a “financial free fall” — hoping to curb losses and recover funds by selling or otherwise monetizing the hospital’s facilities — the lender encouraged a judge Tuesday to move quickly.

“The borrower's financial reports and projections demonstrate that the borrower is in dire financial circumstances,” Charlie Visconsi, a managing director and representative of investment group Preston Hollow Community Capital told the court about 150-year-old Mercy Hospital in Iowa City.

“It has breached its material financial covenants under the bond documents; it is insolvent; it is unable to pay its debts as they mature,” Visconsi said in an affidavit supporting the request “And it continues to suffer unsustainable operating losses.”

A judge hours later denied those requests “at this time” due to procedural hiccups — namely that Mercy had not yet been served with the original petition.

“The motion is denied at this time, but may be renewed once defendant has been served,” District Court Judge Valerie L. Clay wrote, noting, “it should not be a difficult or time consuming task to arrange for service of notice of this action.”

About two hours later, Mercy filed a response Tuesday evening asking the judge to dismiss what it called “a meritless and procedurally defective petition.”

“This petition is not a civil action,” Mercy attorneys argued. “It is a pretextual power play by an investment fund that puts the medical team, employees, patients, and larger community at risk. At its core, this action was filed by Preston Hollow simply because the hospital’s nonprofit board of directors did not agree with Preston Hollow’s aggressive and improper demands to abruptly change management.”

Both Preston Hollow, which invested $41.8 million in Mercy’s 2018 bond series, and Computershare Trust Company, which serves as master trustee for Mercy’s 2011 and 2018 bond issues, filed the request Monday in Johnson County District Court for Mercy to be placed in a receivership.

But Mercy in its response argued the investors’ court filings ignored all the work hospital leaders have done to hire a chief restructuring officer and team — namely Mark Toney and ToneyKorf Partners LLC.

“An experienced health care turnaround professional and fiduciary, is already in place,” according to Mercy’s response. “Toney and ToneyKorf Partners, LLC were retained in April 2023 to serve as an interim management team of the hospital, upon the recommendation of Preston Hollow. Indeed, Preston Hollow demanded and was a part of Mercy Hospital’s selection and appointment of the CRO and team.”

Mercy said it has made “substantial strides” to improve its financial capabilities.

“That Preston Hollow remains unconvinced by the quantifiable and uncontroverted financial strides achieved over the past several months does not, by itself, justify the drastic step of appointing a receiver to effectively supplant the senior management team,” Mercy attorneys argued.

In its court request earlier this week, Preston Hollow suggested Peter Chadwick of Berkeley Research Group to serve as the receiver — touting him as a “seasoned health care professional who specializes in assisting underperforming and financially distressed health care providers.”

Mercy said Chadwick was “the other option” Preston Hollow recommended to last spring. “An option that the board did not select,” Mercy noted, adding, “Preston Hollow now seeks to unilaterally force its selection on them.”

That ToneyKorf — which Mercy characterized as a “responsible fiduciary with over 37 years of turnaround experience” — already is in place should be reason enough to dismiss the petition, according to the hospital.

“This petition is nothing more than a manufactured default and an improper power grab by Preston Hollow and should not be countenanced by this court,” Mercy attorneys wrote in their filing.

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