Bankruptcy judge leans toward confirming Mercy IC liquidation plan exposing MercyOne

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In the face of strident objections from MercyOne — the Des Moines area health care system that for six years provided management over a troubled Mercy Iowa City — a federal judge is leaning toward approving a long-negotiated liquidation plan for the now-bankrupt community hospital that exposes its former managing partner to liability and lawsuits.



“What (MercyOne attorney David Goroff’s) objection is about is taking the target on his client’s back and trying to move it elsewhere,” Mercy Iowa City attorney Dan Simon told Thad Collins, chief bankruptcy judge for the Northern District of Iowa, during an hourslong hearing Thursday over the plan for how to distribute Mercy’s remaining estate assets — expected between $62.7 and $78.6 million.


“I just don't view that as an appropriate exercise,” Simon said of entertaining MercyOne’s objections and demands. “And I don't think your honor should view that or would view that as an appropriate use of estate resources.”




The proposed liquidation plan before the judge materialized after months of negotiations — and, at times, discord — between Mercy Iowa City, its secured bondholders, unsecured creditors, and employees owed retirement savings through a now-frozen pension plan, all of whom now support it.


Although original iterations of the plan made meager provisions for pensioners and those with unsecured claims against Mercy — including health care technology companies owed hundreds of thousands to millions for services provided — the final version involved accommodation and cooperation.


“The plan achieves fundamental fairness, as no party is receiving more than to which it would otherwise be entitled,” according to a declaration supporting the proposal from Mercy’s Chief Restructuring Officer Mark Toney. “The plan is built on concessions and good-faith give-and-take by the parties involved.”


Specifically, the secured bondholders — projected to get 77 to 96 percent of the $62.8 million they’re owed — agreed to contribute $1 million to the hundreds of unsecured creditors who are owed a combined $38.4 million but are likely to recoup 8 to 10 percent of their claims.


The plan also caps the bondholder’s unsecured claims — above their secured amounts — at $1.5 million; provides an advance distribution to the pension trust of $733,333; and promises 60 percent of any money recovered through future lawsuits to unsecured creditors, with the remaining 40 percent going to bondholders.

‘Allegations against MercyOne’​

That last piece — about future litigation — strikes at the heart of the contention MercyOne has with the plan, keeping it from supporting the proposal. Because while the plan “releases” certain parties from liability and future lawsuits — including Mercy, the unsecured creditors, pensioners, the Mercy Foundation, the Sisters of Mercy, and the hospital’s bondholders, who Mercy previously threatened to sue — it doesn’t exonerate MercyOne for any potential wrongs alleged during its yearslong oversight.


“Released parties shall not include MercyOne,” according to Toney’s declaration and the proposed plan, which defines MercyOne as any “entities or parties or persons related to or affiliated with MercyOne” that provided services to Mercy Iowa City before it filed for bankruptcy Aug. 7.


“Throughout these cases, our goal has always been consensus. And I think we have done it and showed that throughout,” Simon said, citing lengthy negotiations with Mercy’s foundation, with its plagued electronic medical record provider, with its pensioners, and with unsecured creditors.






“And we're sitting here today on the precipice of confirming a plan, where all of those major stakeholders agree and support — and that is no small task,” Simon said. “We tried to do the same with MercyOne … We tried to resolve everything. We never got a response. And so here we are with allegations against MercyOne. They're not a released party. And that's why they're objecting.”


Given MercyOne is among the entities with unsecured claims represented by an unsecured creditors committee, it got to vote on the proposed plan — and rejected it. But Simon argued, among other things, that its demands and aspiring road blocks are out of proportion with the amount it’s due — $31,524 — compared to others owed in the hundreds of thousands to millions, including dozens who approved the plan.


“MercyOne has a claim of $31,000,” Simon said. “There are allegations against MercyOne. They can be brought. They can be settled. MercyOne has the ability to defend itself, to the extent that they are brought. That issue is preserved. And frankly, that is one of the only primary issues that's preserved in this case. We've tried to wrap everything up in a neat bow for your honor.”

Judge leans toward confirming Mercy IC liquidation plan exposing MercyOne

In the face of objections from MercyOne — the Des Moines area health care system that for six years provided management over a troubled Mercy Iowa City — a federal judge is leaning toward approving a long-negotiated liquidation plan for the now-bankrupt community hospital that exposes MercyOne...

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‘Target on their back’​

The nearly 150-year-old, 234-bed Mercy Iowa City in 2016 — reporting a drop in assets to $302 million from $321 million in 2015 — announced plans to join the UnityPoint Health network in hopes of improving its operating efficiencies and finances.


Months later, however, Mercy instead unveiled a partnership with MercyOne in West Des Moines — an unaffiliated Catholic health network, which today boasts more than 22,000 providers and staff across more than 300 care locations.


The goal was to strengthen the Iowa City hospital’s finances. But as it continued to struggle — a situation aggravated by COVID-19 — the community hospital in 2021 announced plans to leave its affiliation with MercyOne, to which it was paying an annual $2 million “management service fee.”


“Given the market dynamics as well as challenges from the health care industry, we need to integrate much more closely with a larger health system so we can achieve economies of scale aligning with our long-term goals,” a Mercy Iowa City spokesman said at the time, aligning with a MercyOne statement asserting, “MercyOne simply cannot provide that level of integration.”


But after a monthslong search for a new partner — nearly resulting in the University of Iowa Health Care takeover that later eventuated through Mercy’s bankruptcy — the Iowa City hospital in 2022 said it was ending its search and staying with MercyOne, a decision that proved to be short-lived.


In August 2023 — just days before filing for Chapter 11 bankruptcy — Mercy Iowa City again announced an end to its MercyOne affiliation. And, weeks later in its bankruptcy filings, Mercy Iowa City listed MercyOne among its potential “causes of action” for “operational and financial management.”


During this week’s hearing, attorney Andrew Sherman — representing the group of unsecured creditors that, in large part, supports the proposed liquidation plan but also includes deniers, like MercyOne — cited potential litigation against the West Des Moines health care enterprise as its main reason for opposition.


Calling MercyOne’s $31,000 claim “simply a pretext,” Sherman referenced the plan’s A-G list of parties released from litigation.


“What’s going on is MercyOne wanted an ‘H’,” he said. “And they didn’t get it. That’s what’s going on here, your honor. That’s transparent … They're upset they weren't in there. They have a target on their back. And they're trying to effectively prolong this process, to extract the release.”

‘Self-evidently ridiculous’​

In court documents earlier this month, MercyOne called the proposed liquidation plan “unconfirmable” due to its release of a sweeping collection of potentially liable individuals and entities. It characterized Mercy’s argument that its bondholders wouldn’t consider a plan that didn’t include those releases “self-evidently ridiculous.”


“These (released) classes include, among others, current and former employees, agents, representatives, advisers, consultants, and professionals,” according to MercyOne’s objection. “It is impossible to know specifically who is even included in this overbroad group; the category of ‘employees’ alone likely numbers in the hundreds, if not thousands, of unidentified parties.”


Accusing Mercy Iowa City of a proposal with “what appears to be the broadest and most sweeping release of claims in any modern plan,” MercyOne said its adversary can’t give “any legitimate reason why such broad and free-ranging releases are necessary.”


“In place of facts and evidence, (Mercy) posits ‘on information and belief’ that the bondholder representatives would insist on a release of hundreds if not thousands of other parties or they will walk away from the plan,” according to MercyOne’s objection. “Since the bondholder representatives themselves are being released and exculpated — both very valuable forms of relief for them — the unsupported assertion almost certainly defies belief.”


When making its case before a judge this week, MercyOne argued Mercy Iowa City did no work to investigate whether claims were even possible against the entities and individuals it aims to release. And Judge Collins asked whether they had to.


“Do you have anything to suggest there’s a claim against any of those people you're talking about?” Collins said. “I don't think the bankruptcy process requires us to say, ‘Let's look at everybody who's dealt with the hospital and find out whether we have a claim against them’.”


But MercyOne attorney David Goroff said Mercy Iowa City didn’t bother to find out.


“They don’t even know who all the professionals involved in this were, who all the advisers were, who all the attorneys were,” Goroff said. “They couldn't tell us even what their names were, much less what the actions could be … It would seem odd to me if one could say definitively, based on no investigation, that the only party you could possibly sue is MercyOne.”


Collins shot back, “That wasn’t the testimony either.”


“It was that they settled up a lot of this stuff in a lot of the other negotiations,” Collins said. “A lot of that stuff got mopped up during that, and they said we tried with MercyOne, and it didn’t.”


Following more pushback from MercyOne, Collins said he was leaning toward confirming the plan, “But I’m going to take a little bit to look at it.”