After taking a “short” five-hour break during a bankruptcy auction this month in Chicago to discuss whether to raise their original $20 million offer for Mercy Iowa City’s assets in response to bondholder Preston Hollow’s $27 million counter bid, University of Iowa attorneys — at least initially — decided not to.
According to a transcript of the closed-door Oct. 4 auction made public in recent court filings, the UI did come back with an alternate offer for just two of the clinics — a move seemingly counter to concerns it later aired at the auction about Preston Hollow’s ability to run a “viable” hospital.
“The university has informed us that it will not be increasing its bid with respect to the full hospital, but may be bidding with respect to individual clinics from the hospital,” Mercy attorney Felicia Perlman — with the law firm McDermott, Will & Emery — confirmed on the first day of the two-day auction.
“That’s correct,” said David Gordon, a Nashville-based attorney with the Polsinelli Law Firm, representing the university.
As part of its high bid for the hospital that day, Mercy bondholder Preston Hollow committed to assume operational control Nov. 15 and be responsible for operating losses — capped at $750,000 — for the 15 days before Dec. 1 in exchange for additional assets, like Mercy’s interest in its clinics and the title to all its parking properties.
In making that offer, Preston Hollow criticized the UI for its “supplemental bid,” calling it “peculiar” and potentially objectionable.
Mercy attorney Perlman said her client had discretion to accept bids “for subsets of the assets that will maximize value and ensure the ability for sales to close.” But — given the late hour and difficulty reaching all the creditors it needed to consult with that first day — Mercy opted to suspend the auction.
“I just want to reserve all of our rights to continue to participate at the continued auction,” UI attorney Gordon said before the auction paused.
On Oct. 10, when the auction resumed, the university made a topping bid of $27.1 million for the clinics, the hospital and everything else included in its original offer. That initial offer deal included 19 owned properties and nine leased spaces.
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“Since the auction on Wednesday, the university has had significant time to reflect and have discussions with leadership, and in light of what the university views to be the risk to the community and the State of Iowa, based on the university's concerns about the competing bidder's ability (to continue) to operate Mercy as a general acute-care hospital in a viable manner, the University of Iowa is willing to enhance its bid,” Gordon said.
On top of the $27.1 million, Gordon said — so long as the university is the “winning bidder” and not the backup bidder — it would be willing to absorb operating losses after Nov. 30, if it couldn’t close the deal by that time, and invest at least $25 million into information technology and physical infrastructure within five years.
“The university is not willing to serve as a backup bidder,” Gordon said, referring to a role that would require the UI to fulfill its secondary offer if the winning bidder failed to complete the sale.
In response to the UI counter bid, an attorney for Preston Hollow — Nathan Coco, of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo — accused the university of “completely improper” bidding practices.
“The University of Iowa was disqualified from participating in the auction following its failure to make it a topping bid last Wednesday at the auction,” Coco said, citing a portion of the bid procedures prohibiting bidders from skipping rounds. “And so we were declared the highest bidder on Wednesday. There was no competing bid after a full day of waiting. The University of Iowa confirmed on the record that it was not making an overbid on Wednesday.
“At that point, based on the bid procedures, it was deemed disqualified and is disqualified for all purposes,” according to Coco. “And so this bid is non-conforming, it's inappropriate, it's improper, it flies in the face of bid procedures and cannot and should not be considered by anybody and does not require a response from (master trustee) Computershare or Preston Hollow.”
Gordon said the UI reserved the right to keep bidding at the continued auction — asserting Mercy has broad discretion to run the auction to maximize value.
Following a two-hour break, the university returned with an amended bid that included a higher offer of $28 million. And Preston Hollow came back 40 minutes later with another counter offer — upping the price to $29 million.
That offer included $27.8 million from its ability to “credit bid” — when a bondholder or secured creditor uses the money owed to them to bid on the debtor’s assets — along with $1.2 million to cover, among other things, operating losses once Preston Hollow assumed management Nov. 15.
When asked whether the university wanted to bid higher, Gordon didn’t need to consult his UI clients. “We are not going to further bid,” he said, explaining the UI participated “to ensure access to health care and to jobs.”
“We look forward to working collaboratively with the future operators of Mercy Iowa City, wish the best of luck to Preston Hollow, the bondholder representatives, and the American Healthcare Systems” — which Preston Hollow said it would partner with in running the hospital.
An attorney representing a committee of unsecured creditors asked whether Mercy could designate the UI as the backup bidder, and Mercy attorney Perlman initially said yes — even though “We believe that Preston Hollow has all the wherewithal and intention of closing. So we assume that we are moving forward with them.”
With that, she declared “the highest and otherwise best bid is the bid of Preston Hollow” — followed by a prompt objection from UI attorney Gordon, who said the university would not serve as the backup bidder.
The auction closed, and Mercy seven hours later posted the auction results — declaring Preston Hollow the winner. But the bankruptcy court hasn’t yet set a date for the sale hearing, and signs of backroom discord are evident — with Mercy recently reporting more lost income in September.
Like its August operating report, Mercy for September reported an operating income loss — having spent more on goods and administrative costs than it brought in through sales. Although September’s $2.8 million loss was less severe than August’s $6.4 million loss, the cumulative loss between Mercy’s Chapter 11 bankruptcy filing on Aug. 7 and Sept. 30 was $9.2 million.
Mercy’s dwindling resources are at issue in its discord with Preston Hollow. Because the bondholder believed Mercy could and would be putting millions from its nonprofit foundation toward operations, it now suspects the hospital aims to saddle it with a bigger-than-expected funding burden.
“ (Mercy’s) attempt to levy a significant additional funding burden on the bondholder representative retroactively has created an impasse, and (Mercy) has refused to move forward with the transaction,” according to Preston Hollow.
A court hearing on this issue is scheduled for 1 p.m. Monday.
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According to a transcript of the closed-door Oct. 4 auction made public in recent court filings, the UI did come back with an alternate offer for just two of the clinics — a move seemingly counter to concerns it later aired at the auction about Preston Hollow’s ability to run a “viable” hospital.
“The university has informed us that it will not be increasing its bid with respect to the full hospital, but may be bidding with respect to individual clinics from the hospital,” Mercy attorney Felicia Perlman — with the law firm McDermott, Will & Emery — confirmed on the first day of the two-day auction.
“That’s correct,” said David Gordon, a Nashville-based attorney with the Polsinelli Law Firm, representing the university.
As part of its high bid for the hospital that day, Mercy bondholder Preston Hollow committed to assume operational control Nov. 15 and be responsible for operating losses — capped at $750,000 — for the 15 days before Dec. 1 in exchange for additional assets, like Mercy’s interest in its clinics and the title to all its parking properties.
In making that offer, Preston Hollow criticized the UI for its “supplemental bid,” calling it “peculiar” and potentially objectionable.
Mercy attorney Perlman said her client had discretion to accept bids “for subsets of the assets that will maximize value and ensure the ability for sales to close.” But — given the late hour and difficulty reaching all the creditors it needed to consult with that first day — Mercy opted to suspend the auction.
“I just want to reserve all of our rights to continue to participate at the continued auction,” UI attorney Gordon said before the auction paused.
‘In a viable manner’
On Oct. 10, when the auction resumed, the university made a topping bid of $27.1 million for the clinics, the hospital and everything else included in its original offer. That initial offer deal included 19 owned properties and nine leased spaces.
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“Since the auction on Wednesday, the university has had significant time to reflect and have discussions with leadership, and in light of what the university views to be the risk to the community and the State of Iowa, based on the university's concerns about the competing bidder's ability (to continue) to operate Mercy as a general acute-care hospital in a viable manner, the University of Iowa is willing to enhance its bid,” Gordon said.
On top of the $27.1 million, Gordon said — so long as the university is the “winning bidder” and not the backup bidder — it would be willing to absorb operating losses after Nov. 30, if it couldn’t close the deal by that time, and invest at least $25 million into information technology and physical infrastructure within five years.
“The university is not willing to serve as a backup bidder,” Gordon said, referring to a role that would require the UI to fulfill its secondary offer if the winning bidder failed to complete the sale.
In response to the UI counter bid, an attorney for Preston Hollow — Nathan Coco, of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo — accused the university of “completely improper” bidding practices.
“The University of Iowa was disqualified from participating in the auction following its failure to make it a topping bid last Wednesday at the auction,” Coco said, citing a portion of the bid procedures prohibiting bidders from skipping rounds. “And so we were declared the highest bidder on Wednesday. There was no competing bid after a full day of waiting. The University of Iowa confirmed on the record that it was not making an overbid on Wednesday.
“At that point, based on the bid procedures, it was deemed disqualified and is disqualified for all purposes,” according to Coco. “And so this bid is non-conforming, it's inappropriate, it's improper, it flies in the face of bid procedures and cannot and should not be considered by anybody and does not require a response from (master trustee) Computershare or Preston Hollow.”
Gordon said the UI reserved the right to keep bidding at the continued auction — asserting Mercy has broad discretion to run the auction to maximize value.
Following a two-hour break, the university returned with an amended bid that included a higher offer of $28 million. And Preston Hollow came back 40 minutes later with another counter offer — upping the price to $29 million.
That offer included $27.8 million from its ability to “credit bid” — when a bondholder or secured creditor uses the money owed to them to bid on the debtor’s assets — along with $1.2 million to cover, among other things, operating losses once Preston Hollow assumed management Nov. 15.
When asked whether the university wanted to bid higher, Gordon didn’t need to consult his UI clients. “We are not going to further bid,” he said, explaining the UI participated “to ensure access to health care and to jobs.”
“We look forward to working collaboratively with the future operators of Mercy Iowa City, wish the best of luck to Preston Hollow, the bondholder representatives, and the American Healthcare Systems” — which Preston Hollow said it would partner with in running the hospital.
An attorney representing a committee of unsecured creditors asked whether Mercy could designate the UI as the backup bidder, and Mercy attorney Perlman initially said yes — even though “We believe that Preston Hollow has all the wherewithal and intention of closing. So we assume that we are moving forward with them.”
With that, she declared “the highest and otherwise best bid is the bid of Preston Hollow” — followed by a prompt objection from UI attorney Gordon, who said the university would not serve as the backup bidder.
Dwindling resources
The auction closed, and Mercy seven hours later posted the auction results — declaring Preston Hollow the winner. But the bankruptcy court hasn’t yet set a date for the sale hearing, and signs of backroom discord are evident — with Mercy recently reporting more lost income in September.
Like its August operating report, Mercy for September reported an operating income loss — having spent more on goods and administrative costs than it brought in through sales. Although September’s $2.8 million loss was less severe than August’s $6.4 million loss, the cumulative loss between Mercy’s Chapter 11 bankruptcy filing on Aug. 7 and Sept. 30 was $9.2 million.
Mercy’s dwindling resources are at issue in its discord with Preston Hollow. Because the bondholder believed Mercy could and would be putting millions from its nonprofit foundation toward operations, it now suspects the hospital aims to saddle it with a bigger-than-expected funding burden.
“ (Mercy’s) attempt to levy a significant additional funding burden on the bondholder representative retroactively has created an impasse, and (Mercy) has refused to move forward with the transaction,” according to Preston Hollow.
A court hearing on this issue is scheduled for 1 p.m. Monday.
First bickering, now losses at issue in Mercy Iowa City sale
After taking a “short” five-hour break during a bankruptcy auction in Chicago on Oct. 4 to discuss whether to raise their original $20 million offer for Mercy Iowa City’s assets in response to bondholder Preston Hollow’s $27 million counter bid, University of Iowa attorneys — at least initially...
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