Mercy Iowa City bondholders fear their payout dwindling

IOWA CITY — Nearly two months after a bankruptcy judge confirmed a liquidation plan for the former Mercy Iowa City’s tens of millions in assets, secured bondholders “have yet to receive a single ‘effective date’ distribution” of cash.

And those bondholders — Preston Hollow Community Capital and Comptershare Trust Company — are asking the judge to get involved before the money available dwindles further.

“The secured bondholder representatives are concerned that the delay in transitioning assets and records to the liquidation trust is having a negative effect on values and ultimate recoveries,” according to court documents filed last Friday.

According to the liquidation plan — confirmed June 7 after months of negotiations aimed at bringing into agreement all the parties the community hospital owed money, including creditors and pensioners — the bondholders were supposed to receive a “post-distribution cash” payment “within five business days of the effective date.”

But that brief window after the June 24 effective date came and went without a distribution — despite the payment’s role in garnering bondholder support for the liquidation plan.

“The settlements embodied in the plan were premised upon the bondholders receiving the projected initial bondholder post-distribution cash amount promptly after the effective date,” according to the complaint seeking court intervention.

The bondholders, although owed a debt of $62.8 million, had agreed to take a lesser amount — including the quick cash payment projected to be no less than $20 million, according to documents.

Following the plan’s confirmation, an assigned liquidation trustee told bondholders that — after certain holdbacks — it received from Mercy’s estates $30.5 million.

Acknowledging a commitment of other “initial distributions” spelled out in the plan — including $250,000 to a pension trust and $2.2 million for unsecured claims — bondholders said they anticipated their initial payment was imminent.

But, according to the bondholder’s request for court intervention, “it appears that (Mercy’s) management (firm), ToneyKorf Partners, has not completed the accounting, claims reconciliation and other work necessary to properly calculate and promptly administer the effective date distributions.”

Mercy hired ToneyKorf, which specializes in turning around financially struggling health care organizations, in March 2023. Since Mercy filed for bankruptcy Aug. 7, 2023, the hospital has paid the firm more than $4.6 million, according to court documents.

The bondholders accused ToneyKorf in its recent court appeal of draining and mismanaging the dwindling estate resources.

“It appears that there has been significant delay in transitioning (Mercy’s) accounts, books and records, accounts payable information, claims analyses, and other information relevant to plan distributions from ToneyKorf to the liquidation trustee,” according to the bondholders.

When the accounts, documents and other relevant information finally got to the trustee, the bondholders learned the amount of post-distribution cash available was only $10.3 million — “far short of the amount the secured bondholder representatives expected to be available pursuant to the plan.”

Although the trustee is trying to create a distribution based on records it received, bondholders allege there are inaccuracies and apparent duplication. The bondholders urged ToneyKorf to “assist the liquidation trustee in reconciling any discrepancies as quickly as possible, so that the secured bondholder representatives and all creditors can understand the reasons for the significant discrepancy between estimates of funds available as set forth in the plan and the amounts that are now asserted to be available.”

A bankruptcy judge has agreed to hold a hearing Friday.

Meanwhile, Des Moines-based MercyOne — Mercy Iowa City’s former managing partner and the only creditor the hospital still could sue for liability under the bankruptcy — has appealed confirmation of the liquidation plan to a district court.

MercyOne has asked the district court to halt implementation of the liquidation plan that the bondholders are eager to see implemented. A district court judge has yet to rule on that request.

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