Judge calls hearing as lawyers fight for half of proceeds from Mercy sale

As the bankruptcy proceedings for Iowa City's only municipal hospital wind down and tens of millions of dollars in liquidated assets have already been paid out to bondholders, lawyers, consultants and other professionals are still fighting for their share, with their fees totaling more than $13 million.

If approved, nearly 40 percent of that amount, or $5.1 million, would go to Chicago-based law firm McDermott Will & Emery. Combined with the $4.8 million charged by Mercy's interim managing director, New York-based ToneyKorf Partners, LLC, those two firms account for three-quarters of the fees.

“The sale price of the main asset in this case, the hospital, was $26 million,” says a motion filed by the Liquidating Trust Oversight Committee, asking a judge not to approve the full $13 million in fees, which it notes represent “more than half of the amount recovered.”

“There are very few assets in the trust that could be used on behalf of creditors in this case,” the motion states.

Although U.S. Bankruptcy Judge Thad Collins has already signed off on some fee requests – including several he inadvertently approved and may now withdraw – he told attorneys Thursday that he plans to hold one, if not several, hearings on the fees.

Collins said he wanted to talk about the record fees that led to objections and those that did not – but repeatedly stressed that he was not interested in “chasing” attorney fees.

“I'm not into bounty hunting,” he said. “Frankly, it's the opposite. I believe lawyers should be paid for their work.”

In a status report filed with the court last week, Mercy's liquidator Dan Childers said the trust had paid out $20.4 million to secured bondholders and $733,333 to retirees and held $1.5 million in reserve for unsecured creditors “for future distributions.”

When Mercy filed for bankruptcy in August 2023, it owed more than $62.8 million to secured bondholders, $38.4 million to unsecured creditors, and former employees were owed pension payments ranging from $8 million to $30 million.

$1,975 per hour

Faced with the possibility that a large portion of the proceeds from the sale of the 150-year-old Iowa City hospital could be diverted overseas, retirees this week filed a motion to reduce fees demanded by McDermott, Will & Emery, a case involving 28 of the firm's lawyers, who also billed for the work of a paralegal and nine other research and data analysis professionals.

“McDermott Will & Emery's fee calculations in this case are rife with duplication, with multiple attorneys billing for reviewing the same document, attorneys reviewing each other's work, emails and conferences taking place within the firm, and multiple partners preparing for and attending hearings (even in cases where only one McDermott Will & Emery attorney appeared in court),” the retirees said. “McDermott Will & Emery attorneys frequently bill simply for listening in on the phone at court hearings.”

In addition to the millions in fees, McDermott billed Mercy $245,042 for the time the company spent applying for compensation and processing objections to the fee requests that the U.S. trustee had repeatedly filed against the Chicago firm.

She raised many of the same objections retirees raised this week, including exorbitant hourly rates. Of the 28 McDermott lawyers assigned to the case, 18 charged Mercy more than $1,000 an hour — three partners earned between $1,850 and $1,975 an hour.

Partner Dan Simon, who charges $1,450 an hour, billed $1.2 million for the roughly 10 months he spent on the case. Partner Felicia Perlman, who charges $1,850 an hour, billed just under $1 million for the 522 hours she spent on the case.

Because McDermott is involved in many other corporate restructuring and bankruptcy cases across the country, records show that Simon, for example, billed $1,285 an hour for his work at Envistacom earlier this year. Perlman billed $1,995 an hour for a case she worked on this year for Supply Source Enterprises, Inc., according to court records.

But the retirees argued: “The hourly rates charged by McDermott Will and Emery are well outside the range charged by physicians in this district.”

“Typical hourly rates for practitioners here are about $500 maximum, which is less than half the hourly rate of several McDermott Will and Emery partners and about a quarter of the maximum rates of McDermott Will and Emery partners.”

“At least try again”

Although Judge Collins expressed support for lawyers and their pay – noting, “I'm confident the people are doing a good job in this case, and I'm not going to change my mind on that” – he also characterized the U.S. trustee, who has objected to each of McDermott's fee requests, as “very interested, very attentive, very adept at dealing with these issues, very engaged.”

“And I'm all ears when they talk about these things,” he said. “They're usually reasonable about lawyers' fees and work with them.”

Regarding the trustees' objections to the motions by McDermott and Cedar Rapids-based Nyemaster Goode, attorney Roy Leaf said a resolution may or may not be on the horizon.

“We will at least try again to find a solution with the U.S. Trustee,” Leaf said. “I understand that McDermott has also contacted the U.S. Trustee's office and tried to find a solution. But it sounds like there will be no solution. And I'm not confident there will be a solution.”

Among the fee requests that the judge inadvertently signed early was one for $1.2 million to the New Jersey-based firm Sills Cummis & Gross, PC, which represented the unsecured creditors.

“From my firm's perspective, we took a significant discount as stated in the motion; we took another significant discount as a result of the extensive discussions that I had,” Sills Cummis attorney Andrew Sherman said Wednesday. “And when I had those discussions, I relied on the fact that there would be no further litigation. The idea was to avoid that discussion. But of course, your honor has the final say, and of course we respect that. So we would just ask that you leave your orders in effect. We relied on that.”

Judge Collins said: “This is not what I would call litigation.” And Collins said it was a good sign that the US trustee had not objected to his fees. “There are no major red flags here.”

Vanessa Miller covers higher education for The Gazette.

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