Mercy Hospital Iowa City: Bondholder Fight Ended in Liquidation

Mercy Hospital, Iowa City — a Catholic nonprofit acute care hospital established by the Sisters of Mercy in 1873 to provide clinical experience for medical students at the University of Iowa College of Medicine — filed chapter 11 on August 7, 2023, in the Northern District of Iowa after its largest bondholder initiated a receivership action that disrupted hospital operations within weeks. The hospital separated from its University of Iowa affiliation in 1898 and thereafter operated as an independent community institution for 125 years before the filing. The case followed a sequence of pressures: pandemic-driven volume declines, a failed electronic medical record system that caused a revenue collection crisis, and an ultimatum from Preston Hollow Community Capital demanding the replacement of recently installed management.

Three debtor entities — Mercy Hospital, Iowa City, Iowa; Mercy Services Iowa City, Inc.; and Mercy Iowa City ACO, LLC — entered the case with assets and liabilities each in the $100 million to $500 million range. The hospital held 501(c)(3) tax-exempt status under the United States Conference of Catholic Bishops group exemption, and its 194-bed primary campus at 500 E. Market Street, Iowa City, continued operating under cash collateral throughout the proceedings.

The case resolved through a $28 million asset sale to the University of Iowa — a 40% uplift from the $20 million stalking horse bid — followed by a confirmed plan of liquidation that projected 77%–97% recoveries for bondholders and 8%–10% for general unsecured and pension creditors. Judge Thad J. Collins confirmed the plan on June 7, 2024, overruling MercyOne's objection to the plan's third-party release provisions. The Mercy Hospital Liquidation Trust now administers remaining assets and is pursuing preference recovery actions against former vendors and staffing agencies.

Debtor(s)	Mercy Hospital, Iowa City, Iowa (3 jointly administered entities)
Court	U.S. Bankruptcy Court, Northern District of Iowa
Case Number	23-00623
Petition Date	August 7, 2023
Confirmation Date	June 7, 2024
Judge	Hon. Thad J. Collins
Claims Agent	Epiq Corporate Restructuring, LLC

EMR Failure, Preston Hollow Receivership, and Path to Filing

Mercy Hospital operated from its Iowa City campus with 194 licensed beds, providing a broad range of services including emergency care, family health centers, obstetrics and gynecology, cancer care, behavioral and mental health, home health care, cardiovascular care, bariatric care, high-definition robotic surgery, pain management, and urological services. The hospital employed approximately 1,122 staff, including a medical staff of 365 individuals with over 90 employed physicians, voluntary community doctors, and other contracted providers. Through a for-profit subsidiary, Mercy Services Iowa City, Inc., the debtors also owned or operated 18 primary and specialty clinics in communities primarily south and east of Iowa City.

For the fiscal year ending June 30, 2023, total revenues were approximately $176 million (unaudited), while total expenses reached approximately $193.2 million, and the entity carried total assets of approximately $160 million against total liabilities of approximately $136.7 million. Senior leadership compensation at the time included VP of Nursing and Patient Care Services Kim Volk at $251,722 and VP of Information Technology and CIO Scott Alderman at $249,028.

The First Day Declaration filed by interim CEO Mark E. Toney identified three factors behind the filing.

Pandemic-era volume losses. Between fiscal year 2019 and fiscal year 2023, inpatient days declined 19%, inpatient admissions dropped 26%, and inpatient surgeries fell 51%. Like virtually all community and rural hospitals, Mercy suffered significant financial harm from the pandemic: patient volumes declined while operating costs soared. The shift in the local healthcare workforce toward agency employment drove staffing costs sharply higher while profitable elective procedures remained suppressed, compressing margins on both sides of the income statement.

Failed EMR implementation. In March 2021, Mercy Hospital contracted with Allscripts Healthcare Solutions (subsequently acquired and rebranded as Altera Digital Health) to upgrade its electronic medical record system. The new system went live in March 2022 and proved deeply flawed, causing coding, billing, and collection failures and an inability to submit regulatory reports on time. These deficiencies caused a precipitous loss of revenue in late 2022 and early 2023: delayed bill submissions and an inability to collect on patient encounters caused accounts receivable to balloon by more than 40%. Altera later filed a motion to compel assumption or rejection of the EMR services agreement on December 20, 2023, alongside a motion to seal exhibits — reflecting unresolved obligations under the technology contract that had contributed to the hospital's financial distress.

Preston Hollow receivership action. Preston Hollow Community Capital held all of the hospital's 2018 Bonds and, by owning more than 25% of aggregate bonds outstanding under the Master Trust Indenture, controlled the ability to direct the Master Trustee on both the 2011 and 2018 Bond series. In early June 2023 — just two months after the ToneyKorf Partners management team had been installed in March 2023 at Preston Hollow's own recommendation and was already achieving operational improvements — the bondholder abruptly demanded the immediate replacement of senior management and threatened to withhold any financial support, whether in-court or out-of-court, unless management was replaced.

On July 24, 2023, rather than attending a scheduled July 25 in-person meeting, Preston Hollow filed a notice of acceleration and initiated a receivership action in Iowa state court without prior warning, and hired a communications firm to distribute disparaging statements about the hospital to media, contract counterparties, and elected officials. The First Day Declaration states these actions caused immediate employee resignations, patient cancellations, and a loss of confidence in the hospital's viability, creating an emergency that the debtors determined could only be resolved through a chapter 11 filing.

Revenue Bonds and Pension Underfunding

Mercy Hospital's prepetition secured debt consisted of two series of revenue bonds issued under a Master Trust Indenture administered by Computershare Trust Company, N.A. (successor to Wells Fargo Bank, N.A.) as Master Trustee. The cash collateral motion disclosed aggregate principal outstanding of approximately $62.1 million for fiscal year 2023:

Bond Series	Principal Outstanding	Notes
2011 Bonds	$24,270,000	Master Trustee: Computershare Trust Company, N.A.
2018 Bonds	~$34,220,000 net	$37,875,000 gross, subject to $3.7 million setoff
Total Secured	~$62.1 million	Held exclusively by Mercy Hospital entity

Preston Hollow held all 2018 Bonds beneficially. The 2011 Bond proceeds had been used to fund capital improvements and retire prior obligations; the 2018 Bond proceeds were also used for capital purposes. A $3,701,603 setoff was noticed on August 3, 2023, reducing the 2018 Bonds from $37,875,000 gross to approximately $34,220,000 net. The other two debtor entities — Mercy Services Iowa City, Inc. and Mercy Iowa City ACO, LLC — were not obligated on the bond debt.

Unsecured obligations included a single-employer defined benefit pension plan with approximately $141 million in total obligations against approximately $118 million in plan assets for the period ending June 2023, representing an underfunding of approximately $23 million. Pensioners sought official committee status in October 2023 to address concerns about the management of their pension funds, and the court ultimately appointed an Official Committee of Pension Participants and Beneficiaries with its own counsel and financial advisor. The debtors also carried medical malpractice claims and significant amounts owed to trade vendors and suppliers.

Cash Collateral, Foundation Settlement, and Operating Liquidity

Mercy Hospital operated throughout the case on cash collateral rather than debtor-in-possession financing. The debtors filed a cash collateral motion on the petition date seeking authorization to use funds held by Computershare as Master Trustee for the bondholders.

Proposed adequate protection included replacement liens on all postpetition property that would have constituted prepetition collateral, allowed superpriority administrative expense claims for any diminution in collateral value, and weekly financial reporting to the Master Trustee. The court entered an interim cash collateral order on August 8, 2023, one day after the petition.

Cash collateral was significantly contested by multiple parties. The Official Committee of Unsecured Creditors filed an objection to entry of a permanent cash collateral order, and Computershare and Preston Hollow filed reservations of rights. The UCC also filed a cross-motion seeking to compel the Mercy Hospital Foundation to provide additional operating funds.

The bondholders separately sought appointment of an examiner, and cash collateral hearings were continued multiple times through the fall of 2023. A second interim cash collateral order was entered November 7, 2023 — the same date the sale order was approved — and the contested cash collateral issues were resolved through a broader settlement rather than a standalone final order.

Foundation settlement. Simultaneous with the sale order on November 7, 2023, the court approved a three-party settlement between the debtors, the Bondholder Representatives, the UCC, and Mercy Hospital Foundation. The settlement resolved the UCC's limited objection to the final cash collateral order, its cross-motion to compel the Foundation to provide additional operating funds, the bondholders' examiner motion, and an adversary proceeding filed by the Foundation.

The Foundation contributed $1 million on September 26, 2023 and $1.2 million on September 28, 2023 from its unrestricted funds to offset operating losses. If the winning bidder intended to continue operating as an acute care facility, the Foundation was required to transfer all remaining unrestricted funds, retaining up to $250,000 for wind-down costs. William H. Henrich of Getzler Henrich & Associates was retained to review which Foundation funds qualified as unrestricted.

The bondholders withdrew all subpoenas to the Foundation, and mutual releases were exchanged upon distribution of all unrestricted funds. The Foundation's $2.2 million in contributions provided operating liquidity through the sale closing and the settlement simultaneously resolved the contested examiner and cash collateral issues.

Contested Auction and Sale to University of Iowa

H2C Securities, Inc. (later rebranded Fifth Third Securities, Inc.) had been retained as investment banker in June 2021 when the hospital publicly announced it was seeking a long-term partner or acquirer. Three entities submitted initial indications of interest, including the State University of Iowa.

On August 9, 2023, two days after the petition, the debtors filed a sale motion to sell substantially all assets, designating the State of Iowa, on behalf of the State University of Iowa, as stalking horse bidder at $20 million. The assets sold included substantially all Mercy Hospital assets, excluding causes of action of the estate other than those arising in connection with assumed liabilities. Bid protections included a 4% break-up fee (approximately $800,000) plus expense reimbursement capped at $400,000, payable only if the stalking horse bidder was not the winner and an alternative transaction closed.

The court entered a bidding procedures order on September 14, 2023, setting a bid deadline of October 2 and an auction originally scheduled for October 4, which was later extended.

Contested auction outcome. The auction held October 10, 2023 produced a disputed result. The debtors initially declared a bid by the Bondholder Representatives — Preston Hollow and Computershare — as the winning bid. A material disagreement then arose regarding the terms. The bondholders' bid required the debtors to use their remaining operating cash and Foundation funds prior to closing, a condition the debtors determined was not viable. The bondholders filed a motion to compel compliance with the auction results, which was later withdrawn. The auction was reopened on October 27, 2023, and the University of Iowa was declared the winning bidder at $28 million.

The final purchase price included the $28 million base, the cure amount for assumed contracts, and an amount equal to actual net operating losses (excluding restructuring professional fees) from December 1, 2023 through closing. The sale order was entered November 7, 2023, and the sale closed January 31, 2024.

Subsequent asset dispositions. Following the primary sale, the court approved additional asset sales including a joint venture interest (February 2024), a motion to sell the debtors' beneficial interest in the Thompson Trust (May 2024), and the debtors' interest in Eastern Iowa Rehabilitation Hospital (July 2024). CBRE, Inc. was retained as real estate broker in connection with post-sale property dispositions.

Liquidating Plan, MercyOne Objection, and Creditor Recoveries

The debtors filed a combined Disclosure Statement and Plan of Liquidation on February 23, 2024. A modified Disclosure Statement and Plan were approved for solicitation on April 3-4, 2024. A confirmation hearing was held May 6, 2024, and a further modified plan was filed May 14, 2024. Judge Collins confirmed the modified Chapter 11 Plan on June 7, 2024, with the confirmation order entering the same date. The plan effective date was approximately June 24, 2024.

Upon the effective date, all liquidation trust assets transferred to the Mercy Hospital Liquidation Trust, administered by Liquidation Trustee William H. Henrich of Getzler Henrich & Associates, LLC. The debtor entities were dissolved.

Class	Claim Type	Projected Recovery
1-A	Series 2018 Bondholder Claims	77%–97%
1-B	Series 2011 Bondholder Claims	77%–97%
2	Other Secured Claims	100%
3	General Unsecured Claims	8%–10%
4	Bondholder Deficiency Claims	Subordinated to Classes 3 and 5
5	Pension Claims	8%–10%
6	Intercompany Claims	0%

All five voting classes accepted the plan. A negotiated minimum recovery provision required that the aggregate recovery for Class 3 (General Unsecured) and Class 5 (Pension) creditors not fall below 10% of the aggregate recovery attributable to Class 1-A and 1-B bondholder claims. The Pension Committee — represented by counsel Paula Roby of Day Rettig Martin and financial advisor HBM Management Associates — negotiated this floor as a protective mechanism for pension beneficiaries.

Distribution waterfall. Bondholders in Classes 1-A and 1-B received pro rata distributions from the Bondholder Claim Waterfall Amount. Class 3 unsecured creditors received pro rata distributions from the General Unsecured Claims Waterfall Amount. Class 5 pension claims received the Pension Administrative Cost Amount, 100% of net proceeds from Pension Causes of Action, and the Pension GUC Claim amount.

MercyOne plan objection. MercyOne (Mercy Health Network, Inc.) filed an objection to plan confirmation primarily challenging the plan's third-party release provisions in Article II(A)(1.189)(g). MercyOne argued the releases were overbroad, lacked identity of interest between the debtors and released parties, and that released parties contributed nothing to the reorganization.

Judge Collins issued a memorandum opinion on June 7, 2024, overruling the objection on two independent grounds. First, the court found MercyOne lacked standing to challenge the third-party releases because it had opted out, retaining its rights against released parties. Second, on the merits, the court upheld the releases under the Master Mortgage factors and the business judgment rule, finding the releases were a critical, negotiated component of a consensual plan supported by major constituents. The confirmation order found the indemnification, exculpation, and injunction provisions had been negotiated in good faith and were a critical component of a consensual, globally settled plan.

Mercy Health Network filed a notice of appeal to the Eighth Circuit and a motion to stay on June 17, 2024. The Northern District of Iowa District Court issued findings on October 10, 2024.

Professional Fees, Staffing Disputes, and Preference Actions

Professional	Role	Fees
McDermott Will & Emery LLP	Lead counsel to debtors	$5,091,287 (requested)
ToneyKorf Partners, LLC	Interim management / CRO	$4,348,427 + $150,000 success fee (approved)
Sills Cummis & Gross P.C.	Counsel to UCC	$1,175,716 (approved)
Nyemaster Goode, P.C.	Iowa/local counsel to debtors	$636,400 (requested)
FTI Consulting, Inc.	Financial advisor to UCC	$210,516 (approved)
HBM Management Associates	Financial advisor to Pension Committee	$208,811 (requested)

Total professional fee requests in the case reached approximately $13.4 million. The U.S. Trustee objected to multiple fee applications. ToneyKorf's original $250,000 success fee request was reduced to $150,000 by agreement with the U.S. Trustee.

McDermott's $5.09 million final fee application was contested, with the U.S. Trustee holding back between 15% and 30% of fees in certain periods, totaling $1.07 million in holdbacks; net fees paid through the interim compensation process were $3,624,492 as of the filing date. H2C/Fifth Third Securities received a success fee related to the primary sale to the University of Iowa in addition to its ongoing advisory fees.

Liquidation Trustee fee dispute. Following confirmation, Getzler Henrich & Associates, Cole Schotz P.C., and Sills Cummis & Gross P.C. filed motions to compel the Liquidation Trustee to pay post-petition professional fees and expenses, alleging the Trustee improperly refused to pay amounts owed under the Confirmation Order, Plan, and Liquidation Trust Agreement. On February 24, 2025, the court entered an order directing payment of a $325,000 settlement: $167,303 to Sills Cummis, $145,752 to Getzler Henrich, and $11,944 to Cole Schotz.

Staffing agency disputes and preference actions. At the end of September 2023, Mercy Hospital filed a motion to enforce the automatic stay against five staffing agencies — Aureus Medical Group, Innovate Healthcare, StaffDNA, Travel Nurse Across America, and LiquidAgents Healthcare — alleging the agencies had removed temporary clinical staff from hospital positions prior to the expiration of their employment terms, refused to provide further staffing services, or threatened to do so in an attempt to collect prepetition obligations. The hospital characterized these actions as direct violations of the automatic stay and sought sanctions and attorneys' fees.

Post-confirmation litigation. The Liquidation Trust has since initiated numerous adversary proceedings seeking recovery of preferential transfers from former vendors and staffing agencies, with discovery deadlines extending into 2026. In a separate action, the Liquidation Trust filed an adversary proceeding against MercyOne and other defendants asserting claims for avoidance of transfers, breach of contract, and breach of fiduciary duty. In February 2026, the bankruptcy court denied MercyOne's motion to dismiss the proceeding, allowing the litigation to continue.

Frequently Asked Questions

Who is the claims agent for Mercy Hospital?

Epiq Corporate Restructuring, LLC serves as the claims and noticing agent. The firm maintains the official claims register and distributes case notifications to creditors and parties in interest.

What happened to Mercy Hospital after the sale?

The University of Iowa acquired substantially all hospital assets for $28 million. The sale closed January 31, 2024, and the hospital ceased providing healthcare services under the Mercy name as of that date, with all clinical, educational, and community benefit activities transitioning to University of Iowa Health Care.

In the fiscal year following the sale, the former Mercy entity's reported revenues dropped 88% to $19.7 million — reflecting wind-down activity rather than ongoing hospital operations — while total assets declined from $160 million to approximately $44 million. The Mercy Hospital debtor entities were dissolved following plan confirmation.

What are the projected creditor recoveries?

The confirmed plan of liquidation projects 77%–97% recovery for bondholders (Classes 1-A and 1-B) and 8%–10% for general unsecured creditors (Class 3) and pension claimants (Class 5). A negotiated floor provision requires that unsecured and pension recoveries not fall below 10% of the bondholder recovery amount.

How did the acquisition affect University of Iowa Health Care?

The University of Iowa Hospitals and Clinics reported sustained financial growth following the January 2024 acquisition of Mercy Hospital. UIHC's net position increased by $508.6 million in fiscal year 2024, and the institution had previously reported a total net position of $2.7 billion as of fiscal year 2023. The acquisition preserved acute care access for the Iowa City community under a financially stable academic medical center.

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