Mintz Boosts Recovery for Bondholders in Bankruptcy of Iowa Hospital

Mintz represented the bondholder representative and indenture trustee of two series of bonds ($63 million in aggregate)
The borrower was Mercy Hospital, Iowa City, Iowa, a provider of community-based hospital and outpatient health services
The sale process was enhanced by a multifaceted strategy employed by the trustee and the bondholder representative
Through their efforts, the value of the borrower’s assets was preserved and maximized, additional assets were uncovered, and the bondholders received a substantial recovery in what might have otherwise been a fire-sale result

At the outset of the case, the most valuable asset of borrower Mercy Hospital — its community-based hospital — was positioned for a stalking horse sale to a competitor for a mere $20 million. No other qualifying bidders for the Iowa City, Iowa–based hospital and outpatient health services provider emerged through the bankruptcy sale process.

In order to preserve and maximize the value of the hospital assets, Mintz worked with the trustee and the bondholder representative to formulate a credit bid to establish an auction for competitive bidding. Through that auction process, the stalking horse bidder contributed an additional $8 million in value to the bondholders.

In hospital bankruptcies and liquidations, foundation funds and assets are typically considered to be sacrosanct and unavailable to creditors. Nonetheless, as an additional source of recovery, Mintz brought a challenge against the borrower’s charitable foundation, seeking the turnover of the foundation’s substantial assets. The foundation asserted that its assets were “restricted” and, therefore, could not be reached by or made available to creditors. Mintz challenged the foundation’s assertion, arguing that funds were not subject to legal restriction. Ultimately, a settlement was reached with the foundation and the borrower, pursuant to which approximately $15 million in foundation assets were deemed unrestricted and provided additional liquidity and value to the bankruptcy estate.

In order to provide for the orderly liquidation of the borrower’s remaining assets, including joint venture interests, ancillary real property assets, litigation claims, etc., the trustee and the bondholder representative negotiated a consensual Chapter 11 plan of liquidation with the borrower, the official committee of unsecured creditors, and the official committee of pensioners. Pursuant to the consensual Chapter 11 plan, confirmed by the bankruptcy court, the borrower’s remaining assets were transferred to a trust for the benefit of the bondholders and the borrower’s other creditors, and a liquidation trustee was appointed to monetize those assets. The negotiated plan preserved the rights of the bondholders and other stakeholders, provided a mechanism for additional distributions to bondholders, and resolved potential intercreditor disputes and protracted litigation regarding the allocation of remaining value to the competing stakeholders.

Given the dire financial condition of the borrower and the limited prospects for a robust going concern sale process, when Mintz was first engaged, there was a possibility that the bondholders would not receive a meaningful recovery. However, through the diligent efforts of the trustee and the bondholder representative, the remedial measures and legal actions taken, and successful negotiations with the borrower and the other key stakeholders, asset values were preserved and maximized, and additional sources of recovery were uncovered.