Mercy Iowa City bondholders get first payment after seeking court intervention

IOWA CITY — Three days after asking a judge to get involved in the delayed distribution of Mercy Iowa City’s liquidated assets — accusing the bankrupt hospital’s management team of poor communication and miscalculation in stalling payments — Mercy’s bondholders last week finally got back some of the long-sought $62.8 million they’re owed.

“The bondholders did receive a $16 million distribution on (July 29) and another $1.25 million yesterday,” attorney Megan Preusker told a bankruptcy judge Friday on behalf of bondholders Preston Hollow Community Capital and Computershare Trust Company, who a week before filed a petition seeking court intervention.

Acknowledging Mercy’s liquidation trustee also has distributed funds owed to pensioners, Preusker said, “There’s still more work to be done.”

“We requested a status conference because, as set forth in our pleading, we have concerns about how the plan is being implemented, the pace with which things are moving, what seem to be gaps in communication and the sharing of documents and information, and the potential negative effect that this may have on recoveries for all the trust's beneficiaries,” she told the judge.

‘Massive discrepancy’

Ten months after a financially-free-falling Mercy Iowa City filed for bankruptcy Aug. 7, 2023 — and seven months after the University of Iowa on Nov. 7 bought its former competitor for $28 million in a bankruptcy auction — the judge June 7 confirmed a liquidation plan for the remaining assets involving payments over time not only to Mercy’s bondholders, but the pensioners and creditors it owes money.

Per the deal, bondholders were to get a portion of their total payment “within five business days” of the plan’s effective date of June 24 — and then “every other week.” Based on cash balances of $34 million as of July 17 and other mandatory distributions, bondholders expected their initial post-distribution cash amount to be at least $20 million.

Instead, Preusker said Friday, “The bondholders were told that only $10 million dollars was available to distribute to them because of uncertainties surrounding the amounts that needed to be reserved in order to cover accounts payable that may come due and potential administrative claims, among other things.”

Given the “massive discrepancy” between expectation and reality, and the lateness of any payment, the bondholders filed their request for a court hearing — blaming Mercy’s former management firm ToneyKorf Partners, which specializes in turning around struggling health care organizations, of “significant delay in transitioning the (hospital’s) accounts, books and records, accounts payable information, claims analyses, and other information relevant to plan distributions.”

“Since we filed the request, there has been progress,” Preusker told the judge. “It seems like the parties are working together and communicating better.”

‘Unnecessary and a waste’

In responding to the bondholder allegations, attorney Andrew Sherman told the judge the $10 million initially was contemplated “to establish reserves to make sure that the trust could satisfy all its obligations.”

But, Sherman said, attorneys and others involved “worked steadfastly and earnestly” to move that $10 million up to $17 million.

“A 70 percent growth in a matter of two weeks is better than most in the stock market could ever imagine,” he said. “And there are other substantial assets to be liquidated to pay down the $20 million initial distribution.”

For example, he said, $4 million in accounts receivable were due in June and July, but only $1 million was collected.

“So there’s $3 million that we need to sort of figure out,” he said. “If people can uncover that $3 million, obviously the 3 (million) plus the $17.25 (million) gets us over the $20 million threshold.”

Sherman also said the liquidation trustee welcomes questions or “a phone call.”

To that point, Mark Toney — former chief restructuring officer for Mercy Iowa City and senior managing director of ToneyKorf — took issue with accusations in the court documents accusing his team of mishandling liquidation plan information.

“Most of the issues that were outlined here could have been debunked by a simple phone call to me or to Jim Porter, the former chief financial officer, Mercy Iowa City,” Toney said, reminding the judge that when the liquidation plan became effective, ToneyKorf was relieved of its Mercy duties.

“Yet I would like the court to know that TonyKorf has continued to work toward a transition with the liquidating trustee, giving all the information and the model to the liquidating trustee prior to the effective date. And then post-effective date, we've already incurred over 60-plus hours of uncompensated time,” he said. “This is because we want to see this case continue to be a success.”

Calling the motion and Friday’s hearing “unnecessary and a waste of the court’s time and the estate’s money,” Toney said the $10 million was “an apparent miscommunication.”

“I understand that people cannot always have the information,” he said. “But when assertions are made toward my firm or toward me, I believe that the record does need to be clarified.”

Although more issues remain regarding asset distribution, Preusker said she’s glad things are moving forward, “whether it was the filing of the motion or this would have worked itself out.”

Mounting fees

Through June 30, Mercy has paid $11.6 million in professional fees and expenses — split $5.8 million to attorneys and $5.8 million to “financial professionals,” including $4.6 million to ToneyKorf.

Mercy’s most expensive legal bill is for the McDermott Will & Emery law firm of Chicago, which amassed $4.2 million in requested fees through 10 applications spanning Aug. 7 to May 31 — to all of which a U.S. trustee has objected, at one point saying the billing “shocks the conscience.” But none of the objections have been addressed by the bankruptcy court.

“The U.S. Trustee filed objections to each of the prior applications and as such payment of any of McDermott’s fees has not been approved,” Acting U.S. Trustee Mary Jensen wrote in her most recent objection June 24. “None of the (trustee’s) objections have been heard by the court or otherwise resolved, and there are no orders entered by the court allowing payment of any fees beyond the interim compensation order.”

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