Among major potential losers in the bankruptcy are area residents, as the five-story addition stands unoccupied and unused. The hospital announced that the new building was largely completed a year ago but it has not yet opened.

Signs of a mounting financial crisis worried the contracting joint venture while it was still building the addition in 2023.

Early that year, Modern Building President James Seegert became aware of the hospital's increasingly precarious financial condition and possible default on its loans, according to legal filings. In March 2023, hospital executives wrote that they had provided detailed information "twice previously" and that "continual harassment on these issues seems to be counterproductiuve and takes the focus away from the completion of the work."

Seegert replied to the hospital's CEO and chief operating officer three months later, demanding a meeting to discuss the hospital's ability to pay.

As a result of the bankruptcy filing, the federal civil court judge in Butte County stayed, or froze, the complicated lawsuit involving the contracting joint venture, its sureties, Cannon Design and the hospital.

Staying litigation during a bankruptcy is required under the federal legal code.

But bankruptcies create special problems in construction contract disputes and often pit the building team or its sureties against other creditors in attempts to recover disputed payments.

When an owner files for bankruptcy protection during a project, "creditors must act strategically—filing proofs of claim, seeking stay relief where appropriate," to protect their interests in the bankruptcy process, write Husch Blackwell law firm attorneys Tara LeDay and Maya Dokic.

On the Oroville Hospital addition, the bankruptcy filing was made after Chico, Calif.-based Modern Building, Tempe, Ariz.-based Sundt and the hospital had already landed in court—and the joint venture was no longer working on the project.

In the early months of the joint venture's breach-of-contract lawsuit, well before the bankruptcy filing, the contractors fought and lost a critical court battle.

Modern-Sundt sought to enforce a lien against the hospital for about the same amount of its claim for damages and extra costs. But a federal judge ruled in favor of the hospital, removing the lien from all but a $300,000 portion of hospital assets.

The hospital had been burdened in recent years by the closing of another hospital that was destroyed by wildfire. The five-story expansion, when opened, will add 159,000 sq ft of space and increase the number of beds from 153 to 211.

$5.9 Million Fee Anticipated

According to Modern-Sundt's court complaint, the original contract was for a guaranteed maximum price of $107.7 million, with the firms earning a fee of $5.9 million. Change orders and delays, Modern-Sundt alleged, drove the actual price to $130.7 million. At the time of the lawsuit, the owner had withheld $4.7 million as retainage according to the contract, the joint venture stated.

The original 2019 contract called for completion in 1,096 days from the start of work on April 24, 2019.

In its reply to the lawsuit in 2024, prior to its bankruptcy filing, Oroville Hospital accused Modern-Sundt of failing to complete construction in a timely and competent manner and claimed it is entitled to withhold funds until the work is finished.

The hospital also alleged it was entitled to terminate the joint venture for cause and that Modern-Sundt had effectively abandoned the project, triggering "numerous mechanics liens and payment claims" by subcontractors, "resulting in additional damages" to the owner.