Managing partner: Mercy Iowa City faced multiple threats in run-up to bankruptcy

When Iowa City’s 150-year-old Mercy Hospital cut ties with its managing operator MercyOne and hired New York-based ToneyKorf Partners as an interim successor in spring 2023 — more than four months before filing for bankruptcy — the community hospital had just 60 days “cash on hand.”

“As you can imagine, that wasn’t even enough cash to actually close the hospital in an orderly manner,” let alone keep it open, ToneyKorf Senior Managing Director Mark Toney told a bankruptcy judge Wednesday in seeking his approval of nearly $5 million in fees.

“So we were in a crisis situation,” Toney said, reporting Mercy hired his firm to serve a dual role, both as a manager and bankruptcy representative — even before the hospital in August 2023 filed for Chapter 11 and publicly aired the threat of closure.

Laying out hurdles his firm cleared and mazes his team navigated in moving Mercy from dire straits to bankruptcy to a prospective University of Iowa sale to an auction and then reopened auction that flipped the results and led to a complex transition amid adversarial pleadings and objections — resulting in an eventual liquidation plan that’s now being appealed — Toney on Wednesday made the case for his firm’s $5 million bill.

“Walking in, we had to be thinking about closure,” he said. “And there was a time in this case when people … said something like, ‘Well, they should just close it down and sell it for the real estate.’ And if that had happened at the beginning, the value … would not have been close to the recovery that the estate is experiencing.”

Toney said he spoke with Iowa City’s city manager at one point about zoning restrictions on the 194-bed hospital and learned, “It would have to be sold as an ongoing entity to maximize the value for the organization.”

“So that was part of why we kept fighting every time we came up against a barrier that put the organization at risk,” he said.

‘A hijacking of our IT system’

With U.S. Bankruptcy Judge Thad Collins on Wednesday seeking details of how attorneys spent their time from a handful of firms requesting more than $13 million in the Mercy bankruptcy case — which is more than half the $26 million Mercy got from an auction of its main hospital asset — Toney shared for the first time behind-the-scenes drama and challenges.

“The financial situation was causing a loss of employees,” he said. “And so, as management, we were working to stabilize — we were working to recruit nurses, techs, and employees to come into the organization.”

They also were managing issues unrelated to bankruptcy, including storms and cyberattacks.

“Leaks were occurring in the building because of the roof and lack of capital,” he said. “We were having to try to stabilize the situation when the H/VAC went out, that's the air conditioning system, during the heat spell in our lab and the patient rooms.”

Regarding information technology — in addition to “poor implementation” of a new electronic medical record system that contributed to the hospital’s “demise” — Toney said, “We had a foreign threat to our IT system.”

“We involved the FBI and an outside consulting firm to investigate,” he said. “And we prevented, truly prevented, a hijacking of our IT system that would have caused a collapse of the organization.”

Upon arrival, Toney said his organization found Mercy’s human resources system “in disarray.”

“Record keeping had been poor, in particular, for pensions and the retirement plans,” he said, reporting a concerted effort to “find records that no one had access to, plan documents, participants, retirees.

“No one could put their finger on how much was really owed to the pension at the beginning of the case.”

‘We’ve moved on’

Although Mercy went into its bankruptcy filing with the University of Iowa committed as a “stalking horse bidder” to buy the hospital for $20 million, the hospital’s largest bondholder outbid UI during an initial auction and “won.”

Upon closer inspection and due diligence, however, Mercy and its managing partner realized the new owner wasn’t willing to cover a period of operating costs necessary to keep the hospital open — driving it back to the University of Iowa for help.

“We reached out to the University of Iowa … and said, ‘OK, we're going to reopen the auction. Are you interested?’” Toney said. “And the answer, your honor, was, ‘We've moved on. We lost, and we're not coming back in.’”

That left Mercy with a reopened auction and a current winning bidder unwilling to fund the hospital through the sale closing.

“So we gambled,” Toney said about their decision to reopen the auction anyway, admitting to “begging the university” to come back.

“I did,” he said. “People will tell you in the case that I am persistent. I don't like ‘no’.”

Toney told the university that the likely result of their resistance “was going to be closure, because we would not be able to fund it.”

“And the night before the reopening of the auction — and when I say at night, it was late evening — the University of Iowa said they would come back into the auction,” Toney said. “We had already started planning for a potential closure.

“There were a number of times in this case that we had to prepare for closure, because it's the only thing prudent. This is not a widget factory. We have patients in the beds that we have to prepare for accordingly.”

Judge Collins said learning of those details persuaded him of ToneyKorf’s efforts warranting the $5 million bill, calling its fee request “sort of preapproved.”

Consider the millions

But he wasn’t so convinced of another about $5 million bill from Chicago-based law firm McDermott, Will & Emery — which involved 28 attorneys in this case and also billed for work done by a paralegal and nine other research- and data analyst-type professionals.

Of the 28 McDermott attorneys, 18 charged Mercy more than $1,000 an hour — with three partners making $1,850 to $1,975 an hour. Partner Dan Simon charged $1,450 an hour, billing a total $1.2 million for his about 10 months on the case. Partner Felicia Perlman, at $1,850 an hour, billed just under $1 million for her 522 hours on the case.

In pushing against affirmation of McDermott’s $5.1 million fee request, the U.S. trustee on Wednesday asked a judge to consider the millions it already has received from Mercy — bringing the total to $8.2 million.

Judge Collins said he’s persuaded by the quality of work and quantity of time McDermott attorneys spent on the case — but still intends to go through an in-depth review of its charges.

Vanessa Miller covers higher education for The Gazette.

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