MercyOne appeal: Mercy Iowa City liquidation plan ‘invalid and unenforceable’

IOWA CITY — In arguing its appeal of a Mercy Iowa City liquidation plan that releases thousands of people and entities from potential lawsuits tied to the community hospital’s demise, its former manager MercyOne — among the only entities not released, making it a likely lawsuit target — said a judge erred and overstepped in confirming the plan.

“(Mercy Iowa City) admitted at the confirmation hearing that they did not even investigate what claims they had sacrificed or what revenue they had lost because of this release,” according to MercyOne’s appeal, filed last week in U.S. District Court.

The full appeal from MercyOne — which managed Mercy Iowa City’s operations in the years leading up to its bankruptcy — came months after bankruptcy Judge Thad Collins confirmed the plan, weeks after it took effect, and days after payments started going out to bondholders owed tens of millions.

As of late July, bondholders Preston Hollow Community Capital and Computershare Trust Company — due $62.8 million — had received an initial distribution of $17.5 million. But neither the secured bondholders nor Mercy’s pensioners or unsecured creditors expect to get back all the money the bankrupt hospital owes them, making every dollar — and potential dollar — count.

That, according to MercyOne’s appeal, is among the flaws in the plan, which “releases all claims, including preference, fraudulent transfer and other avoidance actions, against thousands.”

“It does so even though the plan does not provide for full payment of claims, including MercyOne’s.”

Mercy Iowa City — which for years paid MercyOne $2 million annually for its management services — still owes its former Des Moines-based operator $31,524.63.

But that amount, Mercy Iowa City attorneys said, makes clear MercyOne has other motives in fighting the plan — asserting the demands have "nothing to do with MercyOne's interest in maximizing recovery on its $31,000 claim and everything to do with avoiding being a target of future litigation.”

Court intervention

MercyOne in recent months and weeks has tried to stop the plan’s payments and progress by requesting court intervention, first from the bankruptcy judge and then the district court.

Bankruptcy Judge Collins denied the ask, challenging MercyOne’s attorney to “look at that on appeal if I didn’t get it right.” And the district court hasn’t yet ruled on MercyOne’s accusations of “abuse of discretion” against the bankruptcy court.

“MercyOne’s efforts to delay distributions to the rest of (Mercy’s) creditors and pensioners in an effort to continue its dogged pursuit of its self-serving agenda, again seeking to gain leverage and avoid litigation, were correctly and soundly rejected by the bankruptcy court,” according to Mercy Iowa City’s opposition to MercyOne’s appeal.

Upon filing for bankruptcy Aug. 7, 2023, Mercy Iowa City listed several entities it could potentially sue to amass more resources for distribution — including its electronic medical record provider; the bondholders that outed its financial information in driving it to file for bankruptcy; and MercyOne for its “operational and financial management.”

But — as the case evolved through a contentious auction that sold Mercy Iowa City to the University of Iowa for $28 million and subsequent battles over how that income and other assets would be distributed — Mercy Iowa City made peace with both its bondholders and electronic medical record provider.

‘Invalid and unenforceable’

Those entities Mercy Iowa City once considered suing signed off on the distribution plan — compromising some of what they’re owed in exchange for sweeping releases, sparing them and many others from potential lawsuits.

In addition to the bondholders, pensioners, creditors, and foundation, Mercy’s liquidation plan released 18 subcategories of individuals associated with those broader released groups, including employees, managers, officers, agents, advisers, attorneys, bankers, and consultants.

MercyOne in its appeal scoffed at the notion the bondholders would have bailed on the plan if some of the more extraneous members of the “released” group were left exposed to litigation.

“No evidence shows that bondholders’ representatives required these releases,” according to the appeal. “Rather, (Mercy Chief Restructuring Officer Mark) Toney merely speculated so, ‘on information and belief.’”

It defies logic, according to MercyOne, that the bondholders would have “withheld support for the plan and jeopardized their own release unless the pension committee’s notary (a professional) or the foundation’s receptionist (an employee) were also released.”

Plus, “no authority supports the idea that one stakeholder can insist on the release of even one third party (let alone thousands) in exchange for its support.”

Accusing Mercy Iowa City and its representatives of failing to meet their fiduciary duty to amass as much as possible for creditors and pensioners, MercyOne said Mercy’s “belief that the releases were necessary recognizes there were potential, valuable claims, or else what would be released?”

In MercyOne’s appeal of the liquidation plan — or, more specifically, of the bankruptcy court’s rejection of its objection to the plan — MercyOne asked a district court to reverse the bankruptcy court’s prior decision, find releases “invalid and unenforceable,” and remand the case for further proceedings.

Vanessa Miller covers higher education for The Gazette.

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