Mercy Foundation asks court to clarify its role in bankruptcy – The Gazette

Mercy Iowa City is shown Aug. 7 in Iowa City. The hospital has asked its separate nonprofit foundation for $4 million to fund operating expenses, prompting the foundation to ask the bankruptcy court to clarify its power and obligations. , (Jim Slosiarek/The Gazette)

IOWA CITY Mercy Iowa City this month asked its separate nonprofit foundation for $4 million to help fund day-to-day operating expenses through its bankruptcy proceedings, and the foundation said no even as creditors without access to foundation resources insist the hospital should tap the foundation funds first, before draining the cash it could use to repay them.

In a court filing, the Mercy Hospital Foundation on Wednesday sought to have a bankruptcy judge clarify its powers and obligations.

The foundation noted in the filing that a committee of unsecured creditors along with secured bondholders which Mercy owes more than $62 million have asserted the foundation has violated or will violate the foundations bylaws if the foundation does not fund (Mercys) operational needs, or if the foundation does not assist in paying (Mercys) creditors.

The bondholders said in court Sept. 13 they had evidence of (Mercys) sole and absolute control over the foundation, according to the foundations complaint. In contrast, the foundation vehemently asserts that there is no control by (Mercy) over the foundation, the foundations assets are totally separate and distinct from (Mercys) assets, and the foundations assets may not be commingled with or included in (Mercys) estate.

During hearings both last week and this week, attorneys representing Preston Hollow Community Capital Mercys largest bondholder said the hospital is burning through resources available to pay back creditors who have both secured and non-secured claims.

Arguing against a two-week delay to discuss whether Mercy should be allowed to keep using the cash for daily operations that it could use to pay back his clients, attorney Nathan Coco said costs associated with postponement are steep.

A continuation of the final hearing for two weeks is a million dollars a week, which is a pretty steep price from our perspective with respect to our cash collateral, Coco said, urging the hospital use foundation dollars instead.

Attorney Megan Preusker, also representing the bondholders during a discussion this week about Mercys request to keep paying hefty sums for interim management services, noted, This is a case where the burn rate for estate professionals is averaging approximately $483,000 per week.

We have a proposed sale of substantially all (Mercys) assets for $20 million, yet the outstanding secured debt is in excess of $62 million and then there are pension and other liabilities as the court is aware, Preusker said. These are factors to take into account in assessing the reasonableness of a proposed compensation arrangement.

A bankruptcy judge agreed to both delay the discussion about Mercys use of cash collateral and allow Mercy to keep using ToneyKorf Partners for interim management, given some amendments to its compensation deal.

But bondholders and unsecured creditors have maintained their insistence Mercys nonprofit foundation has resources the hospital could and should be using.

In summarizing the debate, attorney Dan Simon representing Mercy noted that while the foundation is a separate entity unencumbered by Mercy Iowa Citys debt, with a separate board and separate attorneys, Mercy Hospital is the foundations sole member and as such has certain rights.

And the committee (of unsecured creditors) and Preston Hollow allege that (Mercys) fiduciary duties demand that they effectively empty the coffers of the foundation, Simon said. And even if the board of the foundation denies their request to do so, the hospital board should replace that board all made up of volunteer board members and override the decision of the foundation and then empty the coffers.

In seeking a court declaration on its rights, powers, and remedies, the foundation asked whether and under what circumstances and for what purpose it must respond to funding requests from Mercy Iowa City and the entities and individuals to which it owes tens of millions.

And it argued its mission directs it to help Mercy solely for charitable purposes.

While (Mercy) may seek funding from the foundation, the foundation has sole discretion in approving or disapproving (Mercys) requests and, in any event, the foundation is only able to partially fund some of (Mercys) capital needs from time to time and only for charitable purposes, but not to fund (Mercys) operational needs, not to make distributions that may result in private inurement, and not to pay (Mercys) creditors, such as the bondholders, the foundation argued in its court filings.

The foundation therefore posits it may, pursuant to its current bylaws, properly and legally deny (Mercys) request to fund (Mercys) operational needs.

Even so, the foundation in its complaint noted, Mercy has more liabilities than assets and its creditors will not receive full payment in (Mercys) Chapter 11 proceeding.

The foundation which, as of March, reported assets totaling $17.7 million, including $9.7 million without restrictions did not guarantee or co-sign on any of Mercys debts.

The bondholders do not have any guarantor or co-debtor claim against the foundation, according to that entitys court filing.

In summarizing the complaint in an email to employees on Thursday, Mercy President and CEO Tom Clancy and Chief Restructuring Officer Mark Toney said the foundation is seeking only legal clarity on its rights and the rights of the other parties.

The bondholders and the unsecured creditors committee have asserted in the bankruptcy case that the foundation should either willingly give up, or Mercy Hospital should force the foundation to release a significant portion of its assets to fund the bankruptcy and pay creditors, the administrators wrote. The foundation believes it has its responsibilities, and we recognize and respect its decision to seek legal guidance.

Despite productive discussions that, on some points, have resulted in consensual compromise, Mercy attorney Simon last week said there has been backroom discord serving as another reason to delay discussion on using foundation dollars vs. Mercys cash collateral.

There's been significant acrimony behind the scenes, he said. We want to bring the temperatures down I think it's time to put down our swords for a short period to redouble the efforts on a settlement.

With the deadline to submit bids on the Mercy assets moved to Oct. 2, and a hearing on how Mercy funds its operations on an interim basis moved to Oct. 3, hospital executives on Thursday told employees that prospective bidders other than the University of Iowa have signed nondisclosure agreements, are performing their due diligence, and have scheduled tours.

We are bound by confidentiality agreements not to disclose the names of any interested parties at this time, Clancy and Toney wrote. However, after the bid deadline passes, we can share the additional parties with you.

The executives also noted that senior leadership next week will host Mercys annual Medical Staff and New Physician Reception and meeting.

We will update our medical staff on the current situation and encourage them to continue to support Mercy Iowa City during these times, they wrote. This will be an opportunity for our medical staff (new and old) to meet, renew and build referral relationships for our future.

Vanessa Miller covers higher education for The Gazette.

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

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Mercy Foundation asks court to clarify its role in bankruptcy - The Gazette