Last week, it seemed all the major issues surrounding Mercy Iowa City’s bankruptcy had been resolved. One of its principal creditors, Preston Hollow Community Capital, a Texas-based specialty finance company, had won the auction of Mercy’s assets, the hospital announced on Oct. 10. In a statement, Mercy called Preston Hollow’s bid the “highest and otherwise best bid.” All that remained was for the judge overseeing the bankruptcy proceedings to approve the deal, and all the remaining paperwork to be completed. It seemed straightforward.
It’s not.
On Thursday night, Vanessa Miller of the Gazette broke the news that Preston Hollow had filed a petition in U.S. Bankruptcy Court, asking the judge to force Mercy to proceed with the sale. The firm claims that Mercy is holding up the process, and trying to redefine the terms of the sale in a way that will “levy a significant additional funding burden on the [Preston Hollow] retroactively.”
At issue is how “operating losses” should be defined in the deal between Mercy and Preston Hollow. As part of that deal, Preston Hollow and California-based American Healthcare Systems, the California-based for-profit company the firm said it will hire to run Mercy as a nonprofit agreed to cover operating losses between Nov. 30 and the day the sale is finalized, which is expected to occur before the end of February.
Preston Hollow claims in its court filing that it understood “the term ‘operating losses’ to have its ordinary meaning, i.e., the amount by which the hospital’s operating expenses exceed its available funds to pay such expenses, including available cash-on-hand,” and that the cash-on-hand should include what remains of the millions the Mercy Hospital Foundation has provided to keep the hospital afloat in recent months. Mercy Hospital Foundation is a separate and distinct nonprofit that provides support to the Mercy Iowa City healthcare system. Mercy Iowa City asserts that foundation funds cannot be included in the cash-on-hand amount to be used to offset operating losses.
Preston Hollow said excluding foundation funds was not part of the deal struck last week, and doing so “would have the practical effect of significantly increasing the funding burden to be borne” by the firm. The firm said it was unaware of Mercy’s plan to prevent it from accessing the funds until it received a proposed budget from Mercy on Tuesday. Preston Hollow wants the judge to rule that the foundation funds should be available to it to cover operating losses.
“Mercy is confident in its position and intent of the bidder and had hoped to continue to work in collaboration with Preston Hollow rather than file a motion,” Mercy officials said in a statement provided to Miller. “Mercy’s management and attorneys are working on strategic options for a timely resolution.”
