DES MOINES, Iowa —
The bankrupt Mercy Hospital of Iowa City is taking its former business partners, MercyOne and Catholic Health Initiatives, to court in a dispute over $55 million.
A federal lawsuit, filed on behalf of the Iowa City hospital and its creditors, accuses MercyOne and CHI of scuttling a planned business deal so as to avoid the obligation of paying workers’ pensions while giving a six-figure severance package to a former top executive who often failed to show up for work.
The claims within the lawsuit, originally made in August as part of Mercy-Iowa City’s ongoing bankruptcy case, are now a separate cause of action that alleges breach of contract, unjust enrichment and breach of fiduciary duty.
MercyOne and its fellow defendants have yet to file a response to the lawsuit, but in a statement issued after the August filing, MercyOne said it has “always acted in the best interests of Mercy-Iowa City.”
MercyOne said it “has become a potential scapegoat for the impact of bankruptcy,” adding that “there is no basis for any claim against MercyOne or any affiliated entity or individual.”
Mercy Hospital-Iowa City and its Liquidation Trust Oversight Committee are suing MercyOne, CHI and an affiliate, Iowa Heart Center, in U.S. District Court for the Northern District of Iowa in an effort to avoid what the plaintiffs call “fraudulent transfers” to MercyOne and Iowa Heart Center.
The lawsuit seeks to recover, on behalf of the Iowa City hospital’s creditors, at least $55 million.
Also named as a defendant in the case is Sean Williams, the former president and CEO of the Iowa City hospital. The lawsuit claims Williams breached his fiduciary duty to the institution by quietly advancing MercyOne’s interests at the expense of the hospital he was hired to lead.
The Liquidation Trust Oversight Committee alleges the Iowa City hospital transferred funds to MercyOne as required by an affiliation agreement the two entered into in 2017, purportedly as part of a move that would allow MercyOne to help the Iowa City hospital with financial and operational issues the latter was facing.
According to the lawsuit, MercyOne made numerous representations to the Iowa City hospital that it would work toward implementing a “complete and strategic affiliation relationship” that would have essentially resulted in a merger.
The agreement, the lawsuit states, was viewed as an “engagement ring,” with the details and formalities of the “corporate wedding” to be worked out at a later date.
Rather than helping the Iowa City hospital address its problems, the lawsuit claims, MercyOne and CHI exacerbated those problems, saddling Mercy Hospital-Iowa City “with steep payment obligations to MercyOne in exchange for a number of services that MercyOne did not provide.”
Additionally, the lawsuit alleges, despite continuing representations to the contrary, MercyOne did not deliver promised services and staff related to financial management, purchasing, risk management, human resources, clinical oversight, medical-staff credentialing, physician recruitment and telemedicine services.
By failing to acknowledge its lack of intent to complete the affiliation, the lawsuit claims, MercyOne induced the Iowa City hospital “to continue on in an expensive relationship for over four years.”
Eventually, the lawsuit claims, MercyOne, faced with its own operating losses and the desire to avoid taking on the additional financial obligation of the Iowa City hospital’s underfunded pension plan, opted to abandon the planned affiliation.
When MercyOne “finally told” the Iowa City hospital of its plans to end their relationship, Mercy Hospital-Iowa City’s financial situation had deteriorated to the point where it was much less attractive to any other potential acquisition partner, the lawsuit claims.
In addition to the allegations against MercyOne and its parent, CHI, the liquidation committee alleges that Williams, the Iowa City hospital’s CEO from 2018 to 2021, worked against the hospital’s own interests.
Williams had previously served as MercyOne’s CEO for Mercy Medical Center-Clinton and was part of MercyOne’s executive team, the lawsuit notes, and alleges that he “was strongly encouraged to, and did, resign” in 2021.
During his tenure as CEO, Williams “was regularly absent” from the hospital during business hours, the lawsuit claims, and on one of his first days of employment, he directed the staff to remove the desktop computer that had been set up for him, stating he did not need it.
“Williams largely attempted to perform his role as CEO,” the lawsuit alleges, “from a smartphone, and was known to have issues reviewing or accessing important documents.”
The lawsuit goes on to allege that at the start of the COVID-19 pandemic, and through his resignation in September 2021, Williams “refused to wear a mask” when at the hospital, despite mask-related directives from the State of Iowa and the hospital’s own policy requiring masks.
“Numerous staff and medical providers at Mercy-Iowa City were furious that their CEO risked their safety during the pandemic by refusing to wear a mask,” the lawsuit alleges. “Williams placed Mercy-Iowa City’s reputation and, most importantly, the health and lives of Mercy-Iowa City’s employees, at significant risk during the COVID-19 pandemic by refusing to wear a mask… Williams’ conduct constitutes gross negligence, bad faith, and/or willful misconduct.”
The lawsuit also alleges Williams had the Iowa City hospital enter into an agreement with the Iowa Heart Center, a wholly owned subsidiary of MercyOne, which involved the center leasing space and equipment from Mercy Hospital-Iowa City at far less than market value, damaging the hospital’s financial position.
On Dec. 1, 2020, the lawsuit claims, Williams was placed on a performance improvement plan. In August 2021, the hospital’s board chairman met with Williams to review his performance, and it was during that meeting that Williams indicated he would resign, the lawsuit alleges.
Although the board did not approve any severance pay for Williams, according to the lawsuit, MercyOne allegedly invoiced the Iowa City hospital $475,975 for severance payments routed to Williams.
