St. Margaret's Health: Illinois Hospitals' Chapter 11 Ends in $38M OSF Sale

St. Margaret's Health - Peru and St. Margaret's Health - Spring Valley 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. The cases were filed without DIP financing and on a sale-and-liquidation track rather than as an operating reorganization, with the Peru hospital sale to OSF Healthcare framed as the cornerstone transaction and a Creditor Trust contemplated to pursue prepetition recoveries against Spring Valley City Bank.

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 on June 28, 2024, the plan went effective on October 18, 2024, and as of the latest reviewed post-confirmation report administrative claims have been paid in full while secured, priority, and general unsecured classes have not yet received any distribution.

Debtors	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

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 reported the closures within a wider 2023 wave of rural hospital shutdowns, 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 still acknowledging the contractual claim balance.

The chapter 11 cases were therefore designed in part as a litigation vehicle: the secured lender held the largest single claim, but the debtors' own theory of the case required that the estate retain the right to challenge prepetition transfers from the same lender after the operating assets had been sold.

Two-Stage OSF Sale and the $38 Million Asset Purchase

The OSF transaction was the cornerstone of the case. 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.

State regulators had cleared the path for the change of control before the bankruptcy. The Illinois Health Facilities and Services Review Board issued an exemption approval on August 1, 2023 for the Peru change of ownership to OSF, expressly noting that St. Margaret's was likely to seek bankruptcy protection to facilitate the asset transfer. OSF completed the asset purchase on November 17, 2023, and reopened the Peru hospital under the OSF Saint Elizabeth Medical Center brand with emergency services and limited inpatient beds. OSF subsequently sought regulatory approval to add medical-surgical and intensive care beds at the Peru campus at a cost of about $5.59 million and announced plans to build a more than $180 million replacement hospital in nearby Ottawa, with the Peru campus positioned as a regional hub. By November 2025, OSF had filed an HFSRB application to discontinue obstetric and intensive care services at its Ottawa campus and consolidate those services to the Peru facility, further developing the acquired hospital as the system's regional center.

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.

The architecture is the standard tool for a hospital case that has already sold its operating assets: the operating proceeds, the OSF holdback, and the SVCB-related causes of action are pooled in a single trust, with the trustee responsible for litigating estate claims and distributing residual value down the priority waterfall.

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, and the reported decision sets out the analysis the court applied 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.

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-firm allowance pool — debtors' counsel, special counsel, financial advisor, and committee counsel — represents the bulk of the trust's professional-fee outflow against estate proceeds and OSF holdback funds.

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.

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