With the $28 million sale of Mercy Iowa City to the University of Iowa just over two weeks away from closing, the 150-year-old community hospital’s largest bondholders are seeking court affirmation they will get the vast majority of that money promptly.
Computershare Trust Company, serving as master trustee for bonds issued to Mercy in 2011 and 2018, along with Mercy’s largest bondholder, Preston Hollow Community Capital, asked a U.S. Bankruptcy judge to direct Mercy to give them $26.8 million of the sale proceeds either at closing or as soon as practicable following closing, which is expected on Jan. 31.
It is undisputed that the master trustee holds valid, perfected, and enforceable first-priority liens upon and security interests in substantially all of (Mercy Hospital’s) real and personal property assets, according to a request filed Thursday evening in U.S. Bankruptcy Court.
In fact, Mercy owes Computershare and Preston Hollow much more than the sale proceeds — $62.1 million, according to court filings — and they are the only creditors with claims secured by property.
Mercy also owes nearly 400 nonpriority creditors more than $17.3 million in unsecured claims — including $1.8 million to its electronic medical record provider Allscripts Healthcare; $544,242 to DePuy Synthes Sales, the orthopedics company of Johnson & Johnson; and $268,250 to the Des Moines-based Iowa Heart Center. And dozens more hold an unknown amount of unsecured but priority claims — including the Iowa departments of Revenue and Health and Human Services, and Medicaid.
Mercy’s reported debt totals don’t include pensioners still owed income through the hospital’s unfunded pension plan and plaintiffs who’ve filed lawsuits against the now-bankrupt enterprise.
Computershare and Preston Hollow — in arguing for most but not all the $28 million the UI is paying for substantially all of Mercy’s assets — conceded that Mercy attributed a value of $1.2 million to its medical clinics, which aren’t subject to the trustee’s secured liens. But the bondholders highlighted the fact that Mercy’s debt far exceeds its sale proceeds.
Throughout the bondholders’ request, they reminded the judge that Mercy has validated the amount it owes and agreed the trustee holds secured liens.
Moreover, after the closing of the sale, (Mercy) will have no material operations that require that they continue to hold the collateral proceeds, according to the request, noting Mercy still will have access to cash on hand and the proceeds of accounts receivable that will continue to be collected post-closing, which may be used to fund administrative and other wind-down expenses.
Mercy continues to rack up expenses, including through mounting administrative costs and attorney fees — even as the U.S. trustee continues to protest, filing her fourth objection in late December to another monthly fee application from the Chicago-based law firm of McDermott Will & Emery.
Apparent yet again in the present application is the pattern of a number of attorneys all billing to complete the same tasks, including a number of partner-attorneys all billing for the same items and to review every document in the case, Acting U.S. Trustee Mary Jensen wrote in her objection.
Since filing for Chapter 11 bankruptcy Aug. 7, McDermott has billed Mercy for $2.15 million in fees — a total that includes a required 20-percent hold back of all fees, per court order. On top of those post-petitions fees, McDermott reported Mercy paid it $3.14 million between Feb. 28 and Aug. 4. Mercy also paid it a $761,951 retainer before the bankruptcy petition was filed.
The (U.S. trustee) filed objections to each of the prior applications, which have not yet been heard by the court or otherwise resolved, and there are no orders entered by the court allowing payment of any fees, Jensen reported in her most recent objection. Resolution of these matters should proceed expeditiously so all attorneys billing in this matter may conform their practices to the expectations of this court.
Among her concerns, Jensen reported a growing pattern across the fee applications of McDermott attorneys billing thousands to spend their time applying to be paid those same thousands.
In just the month of November, McDermott billed $15,690 for nearly 14 hours spent on fee and employment applications and another $13,494 for 11.4 hours related to the trustee’s objections.
It appears one attorney is appointed the task of reviewing and summarizing any objections to applications for compensation, but partner attorneys then also bill to review the objection despite the firm devoting substantial time already to summarizing and drafting responses to the objection, according to Jensen.
Given that Mercy has requested a monthslong extension to draft a plan for liquidation, Jensen urged resolution of attorney fees destined to escalate.
The estate cannot bear the burden of the above objectionable practices continuing on into plan formulation, according to Jensen, reporting McDermott in November billed nearly 75 hours — or $87,292.50 — for work on a plan and disclosure statement, which is apparently weeks if not months from being filed.
For 25 hours of work on the case in the month of November, McDermott partner Felicia Perlman — making $1,850 an hour — billed Mercy $46,620. In comparison, as of December, the average annual salary in Iowa was $49,800.
For 94 hours of work in November, another partner, Daniel Simon — making $1,450 an hour — billed Mercy $136,155.
Nationally, attorneys make an annual average wage of $163,770, according to the federal labor bureau — or $78.74 an hour. Eight of 12 McDermott attorneys who worked on the Mercy case in November billed at a rate topping $1,000 an hour.
Among Jensen’s concerns were increasingly vague explanations of the work McDermott billed for. Simon, for example, billed nearly $3,000 for two hours he spent to prepare for court hearing. Perlman billed nearly two hours — or $3,330 — for analyzing open sale issues and concerns re sale hearing and closing issues.
Hearings on the outstanding issues are upcoming later this month and in early February.
