Mercy Hospital: Foundation support necessary to keep operating

IOWA CITY — Mercy Iowa City's philanthropic foundation has — after contentious backroom negotiations — agreed to help fund the hospital’s operations as it navigates Chapter 11 bankruptcy proceedings.

In asking a U.S. bankruptcy judge to approve a settlement between the hospital, its foundation, and ancillary interested parties — like bondholders and an unsecured creditors committee — Mercy attorneys in court documents Monday said without foundation support, the hospital won’t be able to sustain operations.

“Without the additional liquidity provided by the foundation pursuant to the settlement, (Mercy) will be unable to maintain the hospital’s operations in the ordinary course through the consummation of their proposed sale,” according to Mercy’s request for settlement approval.

Citing the pending assets sale — which was supposed to go before a judge Tuesday but has been delayed — and threatened litigation, Mercy said without a settlement it “will be forced to expend their already limited time and financial resources to address contested issues raised by the bondholder representatives, the committee, and the foundation, efforts which would be prohibitively time-consuming and expensive to the further detriment of (Mercy’s) estates and creditors.”

Mercy early in its bankruptcy proceedings asked the court to allow it to continue using for its daily operations “cash collateral” that could be used to pay back creditors, who promptly opposed such a request — pointing to the foundation as a source for Mercy’s operational resources, given creditors can’t access foundation dollars.

Since its inception in 1969, the foundation has collected gifts from community donors to support Mercy Hospital — occasionally with attached restrictions. As of June 2023, the foundation’s total assets tallied about $18 million.

Bondholders reported $9.7 million were in unrestricted cash and investments.

Mercy, in its first post-bankruptcy monthly operating report, tallied a $6.4 million operating loss.

“The settlement, which represents the culmination of the parties’ extensive, good-faith, arm’s-length negotiations over the last several weeks, is unequivocally in the best interests of (Mercy), their estates, and all other parties-in-interest,” according to the proposed settlement. "Without the additional liquidity provided by the foundation pursuant to the settlement, (Mercy) will be unable to maintain the hospital’s operations in the ordinary course through the consummation of their proposed sale to the severe detriment of their patients, their estates, and all other parties-in interest."

Although details about an auction for Mercy’s assets — which began last week and has been continued — haven’t been made public, attorneys in the proposed settlement indicated the foundation’s support could play a role in the sale.

“Approval of the settlement, including the financial contributions and resolutions contained therein, is necessary and critical to (Mercy’s) continued operations, consummation of their proposed sale, and the ultimate outcome of these Chapter 11 cases,” according to the proposed settlement.

Although it didn’t spell out specific and maximum total amounts the foundation has agreed to supply the hospital, it outlined the following terms:

The foundation will be entitled to keep up to $250,000 “to fund wind-down expenses, legal fees, and other costs of the foundation.”

The foundation had pushed back against assertions the hospital could use its fundraised assets for operational needs.

But, in arguing for court approval of the settlement Monday, Mercy argued, “the settlement avoids the expense, inconvenience, and delay of litigating the adversary proceeding and provides an expeditious, cost-effective resolution of several contested issues in the Chapter 11 Cases while also injecting significant funds into (Mercy’s) estates to help finance the hospital’s operations.”

Vanessa Miller covers higher education for The Gazette.

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