A federal bankruptcy judge has denied a liquidation trustee's unusual motion attempting to force Mercy Hospital's former manager to accept payment for a disputed $31,524.63 claim, finding that the unilateral payment attempt violated the terms of the confirmed bankruptcy plan and would provide preferential treatment to one creditor over others.
In an October 15, 2025 opinion, Chief Bankruptcy Judge Thad J. Collins of the United States Bankruptcy Court for the Northern District of Iowa ruled that Dan R. Childers, trustee of the Mercy Hospital Liquidation Trust, lacked authority to pay MercyOne's disputed Class 3 general unsecured claim.
"While this may be in the Trust's best interests, the Trustee does not have the power unilaterally to pay a Disputed Claim—only to compromise or settle the claim," Judge Collins wrote. "There is no compromise or settlement under the law on this record. There is no mutual assent to the terms. There is only unilateral action by one party."
Background: A Contentious Bankruptcy
Mercy Hospital and affiliated debtors filed for Chapter 11 bankruptcy protection on August 7, 2023. MercyOne, the debtors' former manager, held a Class 3 general unsecured claim totaling $31,524.63 (Claim No. 10277). The reorganization plan was confirmed on June 7, 2024, over MercyOne's objection, and became effective on June 24, 2024. MercyOne subsequently appealed the confirmation order, and the Trustee filed an objection to MercyOne's proof of claim.
Under the confirmed plan, a liquidation trust was established with Childers appointed as trustee to administer assets for the benefit of holders of allowed claims.
The Rejected Payment Offer
In May 2025, the Trust Oversight Committee sent a letter to MercyOne's counsel offering to pay the full $31,524.63 claim amount. The offer was motivated by a cost-benefit analysis showing that "continued pursuit of the appeal of the Confirmation Order will cost the Trust more than the face amount of MercyOne's Proof of Claim."
However, the payment offer came with significant caveats. The letter explicitly stated the Trust and Oversight Committee were "not waiving and instead are reserving and preserving any and all rights, remedies, arguments, claims, and theories, etc. against MercyOne." The Trustee also maintained his objection to MercyOne's proof of claim.
Counsel for MercyOne rejected the cash tender, arguing that acceptance would violate 11 U.S.C. § 1123(a)(4), which requires equal treatment of claims within the same class. The Trustee then filed a Motion to Compel Acceptance of Payment, leading to a telephonic hearing on July 11, 2025.
Court's Analysis: No Settlement Without Mutual Assent
Judge Collins found the Trustee's motion failed on multiple grounds. First, the court determined that no genuine "compromise or settlement" existed under applicable Iowa contract law.
"Settlement agreements are essentially contractual in nature," the court explained, requiring "mutual assent to the terms sought to be enforced." The record showed only unilateral action by the Oversight Committee based on cost-benefit considerations, with no "meeting of the minds" between the parties. MercyOne never accepted the terms, no meet-and-confer occurred, and the Trustee never withdrew his claim objection.
While the Liquidation Trust Agreement granted the Trustee power to "compromise and settle any Disputed Claim," the court found this authority did not extend to unilateral payment without the other party's agreement.
Plan Provisions Prohibit Payment of Disputed Claims
Even more fundamentally, the court found the Plan and Liquidation Trust Agreement explicitly prohibited payment of MercyOne's claim. The agreements contemplate distributions only to holders of "Allowed Claims"—those claims that have been approved by court order or that are undisputed and scheduled.
MercyOne's claim remains a "Disputed Claim" because the Trustee's objection "has not been settled, waived, withdrawn, or overruled." The Plan contains explicit "notwithstanding" clauses stating: "No Holder of a Disputed Claim shall receive any Distribution on account thereof until (and then only to the extent that) its Disputed Claim becomes an Allowed Claim."
Judge Collins emphasized that the use of "notwithstanding" clauses "clearly shows that the drafter intended these provisions to prevail over any that could be interpreted to allow the Trustee to pay Disputed Claims." The court cited Iowa Supreme Court precedent recognizing that such clauses create "fail-safe" provisions that "absolutely, positively prevail" over conflicting language.
The $55 Million Complication
The court identified an additional barrier to payment: Section 7.12 of the Liquidation Trust Agreement prohibits payments to claimants "that is or may be liable to the Debtors or the Liquidation Trust on account of a Cause of Action" until such liability has been resolved.
On August 6, 2025—weeks after filing the motion to compel payment—the Trust Oversight Committee filed a complaint against MercyOne seeking $55 million in damages for fraudulent transfers, voidable transfers, breach of contract, unjust enrichment, negligent misrepresentation, breach of fiduciary duties, and other claims.
"Clearly, MercyOne 'is or may be liable to the Debtors or the Liquidation Trust on account of a Cause of Action,'" Judge Collins wrote, concluding that this provision independently barred payment. "There is no way for the Trustee to pay MercyOne's claim without running afoul of the terms of the Plan and LTA."
Equal Treatment Analysis
The court also addressed whether the payment would violate the Bankruptcy Code's equal treatment requirement. Section 1123(a)(4) mandates that bankruptcy plans "provide the same treatment for each claim or interest of a particular class."
The Trustee argued that the payment would not constitute unequal treatment because it was "consideration for valuable new commitments" rather than treatment for MercyOne's claim, citing the Eighth Circuit's 2019 decision in In re Peabody. In that case, the appeals court held that creditors could receive preferential opportunities to purchase discounted stock in exchange for making "valuable new commitments" to buy additional shares and support the plan.
Judge Collins found Peabody distinguishable. Unlike the creditors in that case, MercyOne "has not made any such new commitments to assist the implementation of the Plan." The court rejected the Trustee's argument that eliminating the appeal constituted new value: "MercyOne did nothing to add value or give up a right in exchange for a benefit like the creditors in Peabody. In fact, MercyOne rejected the Trustee's proposal and took no action at all."
The Mercy Hospital bankruptcy case is pending before Chief Bankruptcy Judge Thad J. Collins in the United States Bankruptcy Court for the Northern District of Iowa. The case number is 23-00623, and the October 15, 2025 opinion was docketed as Document 2086.
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