As Monday’s final sale hearing approaches in the heated bankruptcy of Iowa City’s oldest and only remaining community hospital, precarious deals are being tested by objections and rising tempers — including from Mercy Hospital partners and creditors unlikely to get the millions they’re due.
Steindler Orthopedic Clinic — which for generations has partnered with Mercy, recently making deals related to Steindler’s development of a $29.3 million ambulatory surgery center in North Liberty — took specific issue with the prospect its contracts could be assigned to University of Iowa Health Care, slated to buy Mercy’s assets for $28 million.
“Steindler has the right to enforce the prohibition against the assignment of the North Liberty (ambulatory surgery center) agreements by Mercy without Steindler's consent, as the agreements concern the future development, operation, and ownership of (the) center,” according to an objection Steindler filed Friday in U.S. Bankruptcy Court. “Steindler’s’ ability to decide which entities are allowed to join in that development is a fundamental term of the North Liberty ASC agreements.”
Given that control was central to the deal, according to Steindler’s objection, “Mercy should not be allowed to use the bankruptcy filing to attempt to dictate to Steindler that other entities may have an opportunity to interject themselves into Steindler’s ambulatory surgical center’s development and operation.”
Not said in the filing is that UIHC is building a $525.6 million hospital — just over a mile east of Steindler along the same Forevergreen Road in North Liberty — that will house its own orthopedics department.
The university’s standing offer to buy Mercy Iowa City, going before a judge Monday, comes after years of failed negotiations and backroom drama — including a UIHC offer in 2022 to buy Mercy for a $605 million investment over 10 years.
Steindler, in its objection Friday, for the first time publicly revealed its involvement in that deal’s failure.
“Steindler was approached by Mercy and its representatives, who provided Steindler with ‘UIHC Requirements and Mitigating Alternatives’ and stipulated that UIHC’s offer to acquire Mercy would fail if Steindler would not alter the North Liberty Ambulatory Surgery Center agreements, including modifying the restrictive covenants in the North Liberty Ambulatory Surgery agreements and agreeing to grant 51 percent ownership of Steindler’s North Liberty ASC to UIHC,” according to court documents.
“The very intent of the agreement would fail if the agreements were assumed by the type of competitor for which the agreements were designed,” according to the objection. “The restrictive covenants, which Mercy said was necessary for UIHC to close the widely publicized $605M offer for Mercy, were intentionally drafted to protect Steindler from competition.”
Bankruptcy auction
After UIHC’s 2022 offer failed to materialize, and Mercy’s financial position continued to decline, the hospital was pushed into Chapter 11 bankruptcy in August — announcing at that time the university had made a “stalking horse bid” of $20 million for essentially all its assets.
When the sale went to auction, Mercy’s largest bondholder Preston Hollow Community Capital and master trustee Computershare tapped some of the nearly $63 million in debt Mercy owed them to “credit bid” above UIHC’s $20 million offer.
The university initially opted not to bid above the $20 million offer, prompting Mercy to continue the auction — rather than close it that first day. When the auction resumed nearly a week later, the UI did up its bid — only to be topped again by Preston Hollow, who initially was declared the winner.
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Days later, though, friction emerged over how and who was going to cover Mercy’s ongoing operating losses through the transition to Preston Hollow, which planned a partnership with Los Angeles-based American Healthcare Systems to maintain Mercy as a community hospital.
Given those funding disagreements, Mercy reopened the auction Oct. 27, reversed the results and declared the UI the actual winner — closing the auction and promptly setting a hearing date for Monday.
The university has declined to disclose from where it will pull the $28 million should a judge finalize the sale. Both the UI and Board of Regents officials have repeatedly declined to disclose whether that will come from the campus’ general fund or another funding pool, like patient revenue or investment income.
'Unfairly tip the balance’
After days of silence — while attorneys worked through details of the proposed sale and use of Mercy’s available cash-like assets, or “cash collateral” — documents filed with the court late last week revealed vast protections for its master trustee and bondholders, in hopes of preventing them from objecting to the sale to the university.
Those protections, though, compelled Mercy’s hundreds of unsecured creditors to do just what hospital executives had been trying to avoid: object.
“Any final cash collateral order should only provide adequate protection as required by the bankruptcy code and not unfairly tip the balance of these Chapter 11 cases in favor of the master trustee through an excessive adequate protection package and waivers of rights that will be detrimental to the interests of general unsecured creditors,” according to a Friday objection, noting the master trustee has had adequate interim protections for the past three months.
“There has been no showing whatsoever that such protections have been inadequate,” according to the creditors’ objections. “There is no reason, evidence, or support to change the status quo to tilt the scales of these cases in favor of the master trustee.”
But Computershare and Preston Hollow warned they could and would object to Mercy’s ongoing use of the cash they hold liens on — threatening to throw more wrenches in the Mercy-UI deal — if a judge doesn’t approve the ramped-up protections.
“Each of the covenants, agreements, and protections set forth in the proposed final order are interrelated, and are essential to the (bondholders’) consent,” according to court filings. “In the absence of all the protections delineated in the proposed final order, the (bondholders) would not — and do not — consent to the use of their cash collateral, and hereby expressly reserve all their rights, remedies and objections.”
Mercy, in response to that assertion, filed its own “reservation of rights” — making clear two primary aims at this juncture: selling its assets to the UI and doing so without a fight from the bondholders.
“ (Mercy) now stands on the verge of seeking to obtain the most significant relief yet in these bankruptcy cases at the upcoming hearing on Nov. 6, 2023 — approval of the sale to the university,” according to court filings. “But this was far from a linear path.”
Outlining the “many obstacles” its bondholders already have thrown at Mercy — including court petitions for a receiver, an examiner, objections, depositions and extensive discovery — hospital officials said they “remained steadfast in their efforts to consummate the transaction that it set out to achieve at the outset of these cases.”
And now, given lengthy negotiations on how to proceed, Mercy said it just needs a judge to sign off on the arrangements and protections.
Mercy and the bondholder “have been able to reach consensus on a form of final order approving cash collateral that not only ensures the ongoing funding necessary to bridge to the sale, but most importantly, allows the (bondholder) to not object to the proposed sale.”
'Only viable bidder’
Under the proposed sale agreement, Mercy publicly shared several details, commitments and insights — including its perception of Preston Hollow collaborator American Healthcare Systems.
“The evidence shows that (Mercy) faces the grave probability of imminent business failure and will cease operations within a few weeks if the assets are not sold to a buyer who can operate it successfully,” according to the proposed sale order. “(The university) is the only viable bidder that can and will operate the assets as a viable acute care hospital.”
American Healthcare Systems, however, has taken over several struggling community hospitals nationally in recent years and still is running them today.
Addressing the issue of fair competition — given the university, with its pending purchase, will have a monopoly on the hospital market in Johnson County — Mercy argued “the sale will not substantially lessen competition, because there is no alternative buyer that can or will operate the assets as a viable competitor.”
“(Mercy) has made unsuccessful good-faith efforts to elicit reasonable alternative offers that pose a less severe danger to competition than does the sale, and no such offer has been received,” according to Mercy.
And Mercy, in touting its priority to maintain care for patients and ensure employees get paid, said it has been “highly successful in this regard” and has “outperformed the agreed-upon budget.”
“Census is up, meaning that (Mercy) is taking care of more patients,” according to a court filing. “(Mercy) employees now see a successful end in sight with the proposed transaction to the University of Iowa.”
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Steindler Orthopedic Clinic — which for generations has partnered with Mercy, recently making deals related to Steindler’s development of a $29.3 million ambulatory surgery center in North Liberty — took specific issue with the prospect its contracts could be assigned to University of Iowa Health Care, slated to buy Mercy’s assets for $28 million.
“Steindler has the right to enforce the prohibition against the assignment of the North Liberty (ambulatory surgery center) agreements by Mercy without Steindler's consent, as the agreements concern the future development, operation, and ownership of (the) center,” according to an objection Steindler filed Friday in U.S. Bankruptcy Court. “Steindler’s’ ability to decide which entities are allowed to join in that development is a fundamental term of the North Liberty ASC agreements.”
Given that control was central to the deal, according to Steindler’s objection, “Mercy should not be allowed to use the bankruptcy filing to attempt to dictate to Steindler that other entities may have an opportunity to interject themselves into Steindler’s ambulatory surgical center’s development and operation.”
Not said in the filing is that UIHC is building a $525.6 million hospital — just over a mile east of Steindler along the same Forevergreen Road in North Liberty — that will house its own orthopedics department.
The university’s standing offer to buy Mercy Iowa City, going before a judge Monday, comes after years of failed negotiations and backroom drama — including a UIHC offer in 2022 to buy Mercy for a $605 million investment over 10 years.
Steindler, in its objection Friday, for the first time publicly revealed its involvement in that deal’s failure.
“Steindler was approached by Mercy and its representatives, who provided Steindler with ‘UIHC Requirements and Mitigating Alternatives’ and stipulated that UIHC’s offer to acquire Mercy would fail if Steindler would not alter the North Liberty Ambulatory Surgery Center agreements, including modifying the restrictive covenants in the North Liberty Ambulatory Surgery agreements and agreeing to grant 51 percent ownership of Steindler’s North Liberty ASC to UIHC,” according to court documents.
“The very intent of the agreement would fail if the agreements were assumed by the type of competitor for which the agreements were designed,” according to the objection. “The restrictive covenants, which Mercy said was necessary for UIHC to close the widely publicized $605M offer for Mercy, were intentionally drafted to protect Steindler from competition.”
Bankruptcy auction
After UIHC’s 2022 offer failed to materialize, and Mercy’s financial position continued to decline, the hospital was pushed into Chapter 11 bankruptcy in August — announcing at that time the university had made a “stalking horse bid” of $20 million for essentially all its assets.
When the sale went to auction, Mercy’s largest bondholder Preston Hollow Community Capital and master trustee Computershare tapped some of the nearly $63 million in debt Mercy owed them to “credit bid” above UIHC’s $20 million offer.
The university initially opted not to bid above the $20 million offer, prompting Mercy to continue the auction — rather than close it that first day. When the auction resumed nearly a week later, the UI did up its bid — only to be topped again by Preston Hollow, who initially was declared the winner.
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Days later, though, friction emerged over how and who was going to cover Mercy’s ongoing operating losses through the transition to Preston Hollow, which planned a partnership with Los Angeles-based American Healthcare Systems to maintain Mercy as a community hospital.
Given those funding disagreements, Mercy reopened the auction Oct. 27, reversed the results and declared the UI the actual winner — closing the auction and promptly setting a hearing date for Monday.
The university has declined to disclose from where it will pull the $28 million should a judge finalize the sale. Both the UI and Board of Regents officials have repeatedly declined to disclose whether that will come from the campus’ general fund or another funding pool, like patient revenue or investment income.
'Unfairly tip the balance’
After days of silence — while attorneys worked through details of the proposed sale and use of Mercy’s available cash-like assets, or “cash collateral” — documents filed with the court late last week revealed vast protections for its master trustee and bondholders, in hopes of preventing them from objecting to the sale to the university.
Those protections, though, compelled Mercy’s hundreds of unsecured creditors to do just what hospital executives had been trying to avoid: object.
“Any final cash collateral order should only provide adequate protection as required by the bankruptcy code and not unfairly tip the balance of these Chapter 11 cases in favor of the master trustee through an excessive adequate protection package and waivers of rights that will be detrimental to the interests of general unsecured creditors,” according to a Friday objection, noting the master trustee has had adequate interim protections for the past three months.
“There has been no showing whatsoever that such protections have been inadequate,” according to the creditors’ objections. “There is no reason, evidence, or support to change the status quo to tilt the scales of these cases in favor of the master trustee.”
But Computershare and Preston Hollow warned they could and would object to Mercy’s ongoing use of the cash they hold liens on — threatening to throw more wrenches in the Mercy-UI deal — if a judge doesn’t approve the ramped-up protections.
“Each of the covenants, agreements, and protections set forth in the proposed final order are interrelated, and are essential to the (bondholders’) consent,” according to court filings. “In the absence of all the protections delineated in the proposed final order, the (bondholders) would not — and do not — consent to the use of their cash collateral, and hereby expressly reserve all their rights, remedies and objections.”
Mercy, in response to that assertion, filed its own “reservation of rights” — making clear two primary aims at this juncture: selling its assets to the UI and doing so without a fight from the bondholders.
“ (Mercy) now stands on the verge of seeking to obtain the most significant relief yet in these bankruptcy cases at the upcoming hearing on Nov. 6, 2023 — approval of the sale to the university,” according to court filings. “But this was far from a linear path.”
Outlining the “many obstacles” its bondholders already have thrown at Mercy — including court petitions for a receiver, an examiner, objections, depositions and extensive discovery — hospital officials said they “remained steadfast in their efforts to consummate the transaction that it set out to achieve at the outset of these cases.”
And now, given lengthy negotiations on how to proceed, Mercy said it just needs a judge to sign off on the arrangements and protections.
Mercy and the bondholder “have been able to reach consensus on a form of final order approving cash collateral that not only ensures the ongoing funding necessary to bridge to the sale, but most importantly, allows the (bondholder) to not object to the proposed sale.”
'Only viable bidder’
Under the proposed sale agreement, Mercy publicly shared several details, commitments and insights — including its perception of Preston Hollow collaborator American Healthcare Systems.
“The evidence shows that (Mercy) faces the grave probability of imminent business failure and will cease operations within a few weeks if the assets are not sold to a buyer who can operate it successfully,” according to the proposed sale order. “(The university) is the only viable bidder that can and will operate the assets as a viable acute care hospital.”
American Healthcare Systems, however, has taken over several struggling community hospitals nationally in recent years and still is running them today.
Addressing the issue of fair competition — given the university, with its pending purchase, will have a monopoly on the hospital market in Johnson County — Mercy argued “the sale will not substantially lessen competition, because there is no alternative buyer that can or will operate the assets as a viable competitor.”
“(Mercy) has made unsuccessful good-faith efforts to elicit reasonable alternative offers that pose a less severe danger to competition than does the sale, and no such offer has been received,” according to Mercy.
And Mercy, in touting its priority to maintain care for patients and ensure employees get paid, said it has been “highly successful in this regard” and has “outperformed the agreed-upon budget.”
“Census is up, meaning that (Mercy) is taking care of more patients,” according to a court filing. “(Mercy) employees now see a successful end in sight with the proposed transaction to the University of Iowa.”
Mercy Hospital sale agreements spark objections
As Monday’s final sale hearing approaches in the historic and heated bankruptcy of Iowa City’s oldest and only-remaining community hospital, precarious deals are being tested by objections and rising tempers – including from Mercy Hospital partners and creditors unlikely to get the millions they’re due.
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