Unsecured creditors resolve dispute with Preston Hollow in Iowa hospital bankruptcy

The bankruptcy of Iowa City’s Mercy Hospital is closer to an end with the resolution last week of a dispute between the committee of unsecured creditors, which had filed a complaint on March 25, and trustee Computershare Trust and bondholder representative Preston Hollow Community Capital. 

The plan support agreement reached raised the estimated dollar amount of allowed bondholder claims to $62.8 million from $62.0 million, with the projected recovery share raised to 96%, while unsecured creditors could get 8 to 10 cents on the dollar on their $38.4 million of claims.

Mercy declared bankruptcy on August 9, 2023.

As of July 31, 2023, Mercy had $62.145 million debt outstanding from its Series 2011 and Series 2018 bonds..

Preston Hollow holds all of the Series 2018 bonds. Attorneys for Preston Hollow and Computershare Trust declined to comment. Attorneys for the committee of unsecured creditors did not respond to requests for comment. A Mercy spokesperson did not respond to a request for comment.

After a long and contested auction process, Mercy’s sale to the University of Iowa closed on Jan. 31. In a March 27 hearing, Mercy, Computershare Trust, Preston Hollow, the pension committee and the committee of unsecured creditors reached an agreement on a global resolution of their disputes. They formalized that agreement on Friday.

According to court documents, the recent dispute concerned the value of Mercy’s pre-petition collateral for the $62.145 million bonds outstanding. Mercy believed its value was about $71 million.

The committee of unsecured creditors disputed that, claiming the value of the collateral was around $55.5 million. Its complaint sought a declaratory judgment finding that certain of Mercy’s property was not subject to a valid, enforceable pre-petition security interest as of the petition date. 

The committee sought compensatory damages from Preston Hollow for an alleged breach of the confidentiality agreement; equitable subordination of the bondholder claim; surcharge of Preston Hollow’s collateral; an application of the equities of the case exception; an order determining the allowed amount and extent of the secured status of the bondholder claim; and an order finding the plan support agreement (PSA) is unenforceable. 

Preston Hollow contested the allegations. But in the disclosure statement and joint Chapter 11 plan filed Friday, the parties reached a resolution.

Among other things, the disclosure statement shows that on Jan. 11, Preston Hollow filed a motion for the entry of an order authorizing the distribution of proceeds from the sale of Mercy’s assets. It sought the distribution of $26.2 million, or the sale proceeds from Mercy’s sale to the University of Iowa, to the master trustee for the benefit of the bondholders. The committee of unsecured creditors objected on March 25.

The agreement allows the distribution in exchange for Preston Hollow voting in favor of the plan support agreement, releasing certain parties and exculpating others, and an injunction against bringing further claims against those parties. 

The PSA also calls for a substantive consolidation of Mercy’s estates and Chapter 11 cases for all purposes, including voting, distribution and confirmation. This means “claims of creditors against separate debtors morph [in]to claims against the consolidated survivor.” 

Mercy was a nonprofit Catholic healthcare organization that ran a hospital and 18 clinics.