Bondholder fights Mercy Iowa City request for monthslong delay

IOWA CITY — From when Mercy Iowa City on Aug. 7 made the historic decision to file for bankruptcy, the hospital had 120 days — or until Dec. 5 — to submit a “liquidating Chapter 11 plan.”

On Tuesday, the deadline, Mercy reported that while it’s making progress on a plan, officials don’t yet have it completed and need more time — months more — and asked a U.S. bankruptcy judge to extend until March 4 the period during which Mercy has the “exclusive” right to submit the plan.

Mercy also wants to extend until May 6 the period during which it has the exclusive right to solicit votes and support for a plan — which, among other things, must spell out Mercy’s proposal to monetize its remaining assets, compensate creditors, pursue legal action, liquidate and generally wind down operation of the community hospital that’s been an Iowa City staple for 150 years.

“Termination of the exclusive periods, particularly at this stage of the Chapter 11 cases, would adversely impact (Mercy’s) efforts to preserve and maximize the value of their estates and would further complicate the progression of the Chapter 11 cases,” Mercy argued in its request for extended exclusivity rights. “Termination may disincentivize creditors from negotiating with (Mercy) and could undermine the consummation of (Mercy’s) approved sale to the University of Iowa.

“Moreover, the proposal and solicitation of any competing plan would greatly complicate and increase the cost of administering the Chapter 11 cases.”

Bondholder objects

But Mercy’s largest bondholder, Preston Hollow Community Capital, on Wednesday said the exact opposite is true and that giving Mercy more time to draft a plan will drain assets and spike costs.

“Secured bondholder representatives are prepared to file their own Chapter 11 plan of liquidation, particularly given that the majority of the remaining assets constitute the bondholders’ collateral,” according to an objection of Mercy’s request filed by both Preston Hollow and master trustee Computershare Trust.

Preston Hollow representatives told the court they believe the thousands of past and present Mercy employees owed pension funds “will endorse and support” their plan.

“Secured bondholder representatives intend to continue their discussions with (Mercy), the committee, and the pension committee around a consensual Chapter 11 plan of liquidation,” according to Preston Hollow. “But it is essential that the (bondholders) be given the opportunity to file their own proposed plan if those discussions do not bear fruit over the next several weeks.

“Time is of the essence.”

Among its concerns with additional delays is the millions in accumulating attorneys fees — with Preston Hollow arguing that extending Mercy’s exclusive right to file a plan that ultimately fails to garner support would hamstring bondholders for months, “resulting in over $10 million of dollars of lost value.”

“Aside from the operating losses, the monthly professional fees incurred in these cases have been tremendous — in excess of $3.6 million in aggregate through October,” according to the objection. “(Mercy) projects that monthly professional fees over the next few months will be approximately $2.3 million. Any further delay in filing and confirming a Chapter 11 plan of liquidation will cost the estates millions of additional dollars, thus reducing the distributions to creditors.”

'No ulterior motive’

Mercy officials, in response to questions from The Gazette, said exclusivity extensions nearly always are sought and nearly always are granted in complex cases.

U.S. Bankruptcy Code allows them when an indebted party shows “cause,” which Mercy said exists here — in its pursuit of a “consensual and value-maximizing liquidating Chapter 11 plan.”

“Congress did not intend the 120- and 180-day exclusivity periods to be a hard and fast limit,” Mercy argued. “Rather, Congress intended that the debtor’s exclusivity periods be of an adequate length, given the circumstances, for a debtor to formulate, negotiate, and draft a viable plan without the disruptions that would occur with the filing of competing plans of reorganization.”

Mercy told The Gazette that “a significant portion” of the accruing attorneys fees are “attributable to actions caused directly by the bondholder.”

In deciding whether to bar others from filing “liquidation” plans and allow Mercy more time to do so, hospital attorneys argued the court should weigh a series of factors — including the size of the hospital operation and whether it’s paying debts as they come, making “good faith progress toward reorganization,” showing reasonable potential for a viable plan, and continuing creditor negotiations.

The judge, according to Mercy’s request, also should consider whether unresolved contingencies exist and whether — in seeking an extension — Mercy aims to pressure creditors to submit to its demands.

“Granting the requested extensions of the exclusive periods will not pressure (Mercy’s) creditor constituencies or grant (Mercy) any unfair bargaining leverage,” according to its request. “(Mercy) has no ulterior motive in seeking an extension.”

Mercy argued this is its first extension request; it has and will keep paying “undisputed post-petition obligations” and has “unresolved issues” that could affect pensioners.

Highlighting points of “progress” — in justifying an extension — Mercy listed efforts throughout the bankruptcy to, among other things, continue operating, comply with bankruptcy code, conduct an auction and assets sale to the University of Iowa for a winning bid of $28 million, and research “potential claims and causes of action.”

“ (Mercy) has, throughout the Chapter 11 cases, sought to reach consensual resolution of issues raised by their key creditor constituencies,” according to its request. “(Mercy) prefers to continue to discuss mutual resolution of claims and provisions of the plan that best address each of their interests rather than be forced to initiate or defend costly litigation that may result if a nonconsensual and premature plan is filed.”

The Mercy case is complicated, according to its argument for extension.

“There are over 1,200 employees, 90 physicians, and their medical staffs,” according to Mercy’s request. “These operations are uniquely heavily regulated and in an accredited industry. Nearly every aspect of (Mercy’s) operations, from patient services to billing, is subject to strict rules and regulations that require methodical and careful planning and support.”

'No tangible progress’

But Preston Hollow argued it’s not that complicated.

“We are four months into these Chapter 11 cases, and it has been clear since the outset that (Mercy’s) intention was to liquidate substantially all of their assets rather than to reorganize,” according to the bondholders’ objection. “The court-approved sale of (Mercy’s) operating assets is expected to close before the end of January 2024, after which time (Mercy) will no longer operate as a going concern. And yet, very little progress has been made to date regarding the formulation of a consensual Chapter 11 plan.”

Allowing more delay, according to Preston Hollow, will “substantially reduce the overall recovery to creditors.”

“This is a not a complex, multifaceted reorganization that requires a seven-month plan formulation process; it is a straightforward liquidation that merely requires a mechanism for allocating the value associated with the (Mercy’s) liquidated assets as they are monetized.”

Letting administrative costs accumulate will impede a “fair plan” and become especially detrimental to Preston Hollow, they asserted.

“ (Mercy) now knows what sale proceeds will be coming into their estates and have a better sense of the values of their other assets,” according to Preston Hollow.

“Meanwhile, the Chapter 11 cases are being funded from the use of the (bondholder’s) cash collateral. This is the appropriate time to initiate a plan process, not months from now when the hospital’s assets and operations will have transferred to the University of Iowa and the cases will continue to exist solely to pay professional fees.”

Countering Mercy’s assertions that it’s making progress in negotiations with creditors, Preston Hollow reported, “No tangible progress has been made to date.”

Vanessa Miller covers higher education for The Gazette.

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