St. Margaret's Health - Peru and St. Margaret's Health - Spring Valley ran their chapter 11 cases as a sale-and-liquidation rather than an operating reorganization, selling the Peru hospital to OSF Healthcare and confirming a joint liquidating plan that channels prepetition recoveries against Spring Valley City Bank through a Creditor Trust. The two Illinois Valley hospitals filed chapter 11 in the U.S. Bankruptcy Court for the Northern District of Illinois on August 31, 2023, lead case 23-11641, before Hon. David D. Cleary, without DIP financing.
The First Day Declaration of President and CEO Timothy A. Muntz frames the filing as a controlled wind-down: sell the Peru hospital to OSF, market the Spring Valley real estate, investigate alleged prepetition setoffs by the prepetition secured lender, and distribute proceeds through a creditor-trust waterfall. The court confirmed the joint liquidating plan and the plan went effective in October 2024; as of the latest post-confirmation report, administrative claims have been paid in full while secured, priority, and general unsecured classes have not yet received any distribution.
St. Margaret's Health - Peru and St. Margaret's Health - Spring Valley (jointly administered)
Court
U.S. Bankruptcy Court, Northern District of Illinois (Eastern Division)
Case Number
23-11641
Petition Date
August 31, 2023
Judge
Hon. David D. Cleary
Plan Type
Joint liquidating plan
Confirmation Date
June 28, 2024
Effective Date
October 18, 2024
Case Snapshot
Hospital Shutdown and Path to Filing
The Peru and Spring Valley hospitals served the Illinois Valley before a combination of pandemic financial pressure, a 2021 cyberattack, and staffing shortages drove the system toward closure. The Peru campus stopped operating in early 2023 after emergency-room physician coverage was terminated, and Spring Valley closed in June 2023, putting both facilities on a path that ended with the August 31, 2023 chapter 11 filing.
In the First Day Declaration, Muntz, who had served as president and CEO of Spring Valley since 1993, stated that the loss of Peru emergency-room physician coverage forced the Peru shutdown and required the debtors to file a notice of temporary suspension of services with Illinois regulators. The first-day filings also describe an earlier operating strategy under which the Illinois Health Services Review Board had approved discontinuance of ten obstetrical beds at Spring Valley as a first step toward consolidating inpatient acute services at Peru, with outpatient and ambulatory care remaining at Spring Valley — a plan overtaken by the Peru closure.
By the time of the petition, the debtors had pursued a prepetition restructuring path that did not produce a viable out-of-court outcome. Muntz stated there were serious concerns that the debtors lacked enough liquidity to maintain operations at Spring Valley while waiting for the OSF transaction and related regulatory approvals, which led the debtors and OSF to structure the deal in two stages so that initial proceeds could close before the second-stage hospital sale. Becker's Hospital Review named St. Margaret's among rural hospitals in crisis mode following the filing, and the closures were later included in Becker's running tally of 36 rural hospital closures since 2020.
SVCB Secured Debt and Alleged Prepetition Setoff
Spring Valley City Bank was the debtors' primary secured lender. The First Day Declaration states that, based on prepetition and proposed sale proceeds, the debtors believed SVCB's balance as of the petition date was almost $26.781 million. Local reporting around the petition placed the disclosed liability at $27 million, within the $10–$50 million liability range the voluntary petition disclosed across more than 1,000 creditors.
Muntz also stated that one objective of the chapter 11 cases was to investigate potential actions to recover millions of dollars that SVCB allegedly set off before the filing, a position that aligned with public statements attributing the closure to the bank. The Disclosure Statement defines SVCB's claim against Peru as Class 1(a) and SVCB's claim against Spring Valley as Class 1(b), with each deemed allowed in full subject to section 502(d) issues, preserving the estate's setoff- and recovery-related defenses against the secured creditor while acknowledging the contractual claim balance.
Two-Stage OSF Sale and the $38 Million Asset Purchase
The debtors' sale motion describes a two-stage structure in which OSF first acquired certain clinics in June 2023 for approximately $5.65 million, with the second-stage hospital asset sale to be approved in chapter 11. The motion states that OSF's initial term sheet, dated March 3, 2023, valued the sale assets at $20 million and that subsequent negotiations increased total consideration to $38 million, with OSF agreeing to continue providing healthcare to indigent patients under its financial-assistance policy.
The Spring Valley facility remained outside the OSF transaction and was instead marketed by Hilco Real Estate under a bankruptcy-sale process, with PR Newswire reporting a July 24, 2024 bid deadline. The confirmed plan ultimately treated an OSF holdback as property held in escrow under the asset purchase agreement and sale orders while OSF asserted alleged representation-and-warranty breaches, leaving a discrete escrow workstream for the Creditor Trust to resolve after consummation.
Joint Liquidating Plan and the Creditor Trust
The Disclosure Statement and Joint Liquidating Plan describe a liquidating structure under which the plan would be consummated on the effective date and a Creditor Trustee would administer the Creditor Trust assets and funds for the benefit of trust beneficiaries and holders of allowed administrative-expense claims. The plan defines Creditor Trust assets to include Creditor Trust funds, estate causes of action, books and records related to those causes of action, remaining estate assets, attorney-client privileges, and other rights transferred on the effective date.
Creditor Trust funds are defined to include the estate funds plus the OSF holdback, and the plan provides that trust expenses include bank fees, professional fees and costs, U.S. Trustee fees, and other wind-down costs. Allowed administrative-expense claims are paid in full as soon as practicable after the effective date or when allowed, and allowed priority tax claims are paid in full over time as required by the plan. Holders of allowed Class 4 general unsecured claims receive a pro rata share of remaining Creditor Trust funds after higher-priority obligations are satisfied, and the plan defines the administrative-expense bar date as 30 days after the effective date for professional-fee claims arising before the effective date and other covered administrative claims arising after May 1, 2024 and before the effective date.
Combined Hearing and Confirmation
The court conditionally approved the disclosure statement and authorized a combined hearing over a U.S. Trustee objection. Judge Cleary's May 8, 2024 opinion overruled the U.S. Trustee on the combined-hearing question in a small-debtor liquidating case where the disclosure statement and confirmation issues overlapped substantially. The court entered the confirmation order on June 28, 2024 confirming the joint liquidating plan, and the effective-date notice records that the plan effective date was October 18, 2024, fixing the bar dates for administrative claims, professional-fee claims, and rejection claims.
Post-Confirmation Distributions and Claims Litigation
The March 9, 2026 post-confirmation report identifies the reporting entity as the SMH Creditor Trust, with Michael Brandess as trustee, and confirms the August 31, 2023 petition date, the June 28, 2024 confirmation date, and the October 18, 2024 effective date. The report shows cumulative cash disbursements of $1,427,019 since the effective date, with $123,253 disbursed during the quarter ended December 31, 2025.
Cumulative professional fees and expenses paid since case inception totaled $2,417,740, with no professional-fee payments during the current quarter. The report's itemized figures show approximately $992,171 paid to Adelman & Gettleman, $561,569 to Huron Consulting Services, $519,864 to Levenfeld Pearlstein, $336,636 to Hinshaw & Culbertson, and $7,500 to KCP. Allowed administrative claims had been paid $526,511 cumulatively, representing 100 percent of allowed amounts, while secured, priority, and general unsecured classes had received no distributions as of December 31, 2025.
Following the closures, the debtors designated Cariend LLC as custodian for their medical records, with patient notification published through the aboutsmh.org portal.
The Creditor Trust has continued to work through claims reconciliation. By January 2026 the trustee was litigating omnibus claim objections addressing wrong-case claims, late-filed claims, insufficient-documentation claims, and claims asserted with improper priority. The court's amended order on the trustee's second omnibus objection withdrew objections to Fisher Healthcare claims 10255 and 10256 but continued the hearing on Blue Cross and Blue Shield of Illinois claims 10220 and 10222 to February 4, 2026 at 10:30 a.m. Central Time, leaving an active claims-reconciliation track that has so far prevented any distribution to non-administrative classes.
Final Fee Allowances for Case Professionals
Final fee orders entered on December 11, 2024 allowed large professional claims across the case. Levenfeld Pearlstein, counsel to the unsecured creditors' committee, was allowed $1,039,727.50 in fees and $3,394.05 in expenses. Hinshaw & Culbertson, special counsel to the debtors, received final allowances of $335,451 plus $1,185.43 in expenses for Peru work and $339,079.50 plus $230.26 in expenses for Spring Valley work.
Huron Consulting Services received final allowances of $556,666.43 in fees plus $4,902.58 in expenses for Peru and $706,902.50 in fees plus $4,902.58 in expenses for Spring Valley, with unpaid-fee amounts authorized for trust payment as well. Adelman & Gettleman, debtors' counsel, received final allowances of $984,492.00 in fees plus $7,679.36 in expenses for Peru and $982,750.50 in fees plus $4,941.80 in expenses for Spring Valley, with additional unpaid amounts authorized for trust payment. The four firms — Adelman & Gettleman as debtors' counsel, Hinshaw & Culbertson as special counsel, Huron Consulting Services as financial advisor, and Levenfeld Pearlstein as committee counsel — are paid from Creditor Trust funds composed of estate proceeds and the OSF holdback.
Creditor Trust Adversary Proceedings
The Creditor Trust initiated two adversary proceedings after confirmation to pursue recoveries for estate beneficiaries.
The first amended complaint against Spring Valley City Bank (Adv. No. 25-00221) alleges that SVCB entered into a forbearance agreement with the debtors on April 20, 2023 but then declared a pretextual default and seized $7,294,425.38 from the debtors' operating account on June 5, 2023. The complaint asserts seven counts: avoidance of the improper setoff as a breach of contract, avoidance as a preferential transfer under 11 U.S.C. § 547, avoidance of a transfer made to create a setoff right under 11 U.S.C. § 553, breach of the forbearance agreement, promissory fraud, equitable subordination under 11 U.S.C. § 510(c), and disallowance of SVCB's proofs of claim under 11 U.S.C. § 502(d). Judge Cleary's March 18, 2026 order granted SVCB's motion to dismiss Count V (promissory fraud) with leave to amend and denied dismissal as to Counts 1 through 4. The Trustee filed the amended complaint on April 15, 2026 repleading the promissory fraud count; SVCB's motion to dismiss the amended count is still being briefed as of the June 9, 2026 reply deadline. A Rule 9019 settlement motion was filed on June 5, 2026.
In a separate proceeding, the Trustee filed an adversary complaint for insurance coverage and turnover on February 13, 2026 (Adv. No. 26-00222) against CFC Underwriting Limited and certain underwriters at Lloyd's of London under Policy No. ESJ0026254522. The policy covered the period from December 31, 2020 through December 31, 2021 and carried a $5 million aggregate limit for income loss and extra expense arising from the February 2021 ransomware attack that preceded the bankruptcy. The complaint alleges the defendants issued an interim payment of approximately $2.04 million and then refused to pay the remainder; the Trustee seeks at least an additional $2,959,128, asserting that the defendants arbitrarily truncated the covered indemnity period to three months and otherwise adjusted the claim in bad faith.
Frequently Asked Questions
Why did St. Margaret's Health file chapter 11?
The debtors filed on August 31, 2023 to sell the Peru hospital to OSF Healthcare, market the Spring Valley real estate, investigate alleged prepetition setoffs by Spring Valley City Bank, and distribute proceeds through a Creditor Trust. The First Day Declaration attributes the filing to a failed prepetition restructuring path, the Peru shutdown after loss of emergency-room physician coverage, and liquidity concerns at Spring Valley while awaiting OSF transaction approvals.
What was the OSF Healthcare transaction worth?
OSF's initial March 3, 2023 term sheet valued the assets at $20 million, and negotiations increased total consideration to $38 million, structured in two stages. OSF acquired certain clinics in June 2023 for about $5.65 million and completed the Peru hospital purchase on November 17, 2023.
Who is the Creditor Trustee?
The post-confirmation report identifies Michael Brandess as trustee of the SMH Creditor Trust.
Have unsecured creditors received any distributions?
As of the December 31, 2025 reporting period, allowed administrative claims had been paid in full at $526,511, but secured, priority, and general unsecured classes had not received any distribution.
confirmed the joint liquidating plan https://www.bankruptcyobserver.com/bankruptcy-case/ST-MARGARETS-HEALTH-PERU
combination of pandemic financial pressure, a 2021 cyberattack, and staffing shortages https://www.wqad.com/article/news/health/st-margarets-spring-valley-illinois-closure-hospital/526-72e77065-d617-4250-952f-25d7433bd365
St. Margaret's among rural hospitals in crisis mode https://www.beckershospitalreview.com/finance/rural-hospitals-in-crisis-mode/
Becker's running tally of 36 rural hospital closures since 2020 https://www.beckershospitalreview.com/finance/36-rural-hospitals-have-closed-since-2020/
voluntary petition disclosed across more than 1,000 creditors https://www.shawlocal.com/illinois-valley/news/local-news/2023/09/01/st-margarets-files-chapter-11-bankruptcy-for-peru-spring-valley-hospitals/
public statements attributing the closure to the bank https://www.beckershospitalreview.com/finance/shuttered-illinois-hospital-ceo-blames-closure-on-bank/
completed the asset purchase https://www.25newsnow.com/2023/11/17/osf-healthcare-completes-purchase-st-margarets-health-peru/
reopened the Peru hospital https://www.aol.com/closed-more-illinois-hospital-set-201644365.html
application to add medical-surgical and intensive care beds https://hfsrb.illinois.gov/content/dam/soi/en/web/hfsrb/events/documents/2024/august-8-2024-state-board-meeting/7.%2024-014%20OSF%20SAINT%20ELIZABETH%20MEDICAL%20CENTER-PERU.pdf
OSF proposal to consolidate obstetric and intensive care services from its Ottawa campus to Peru https://hfsrb.illinois.gov/content/dam/soi/en/web/hfsrb/events/documents/2025/november-18-2025-state-board-meeting/25-013%20OSF%20Ottawa-NOVEMBER.pdf
marketed by Hilco Real Estate https://hilcoglobal.com/news/former-st-margarets-health-hospital-in-central-illinois-hits-the-market-through-bankruptcy-sale-with-hilco-real-estate-sales/
PR Newswire reporting a July 24, 2024 bid deadline https://www.prnewswire.com/news-releases/former-st-margarets-health-hospital-in-central-illinois-hits-the-market-through-bankruptcy-sale-with-hilco-real-estate-sales-302173863.html
May 8, 2024 opinion https://caselaw.findlaw.com/court/us-ban-crt-n-d-ill-eas-div/116164899.html
This article was researched and written with AI assistance, using court filings, public records, and news sources. AI-generated content can contain errors. Verify all information against primary sources before relying on it. This is not legal or financial advice. See the disclaimer.