A $16.9 million claim for work on a hospital addition by a joint venture of contractors Modern Building Co. and Sundt Construction is stalled and delayed indefinitely following the December bankruptcy filing of the Oroville, Calif., facility and its parent company OroHealth. The contractors are listed in the filing as the second unsecured creditor. Cannon Design, the project’s architect, is another unsecured creditor, with $324,000.
Among the biggest potential losers from the bankruptcy are local residents, as the five-story apartment building sits vacant and unused. The hospital announced that the new building was largely completed a year ago, but it has not yet opened.
Signs of a growing financial crisis worried the contracting joint venture while it was still building the 2023 addition.
Earlier that year, Modern Building President James Seegert became aware of the hospital’s increasingly precarious financial situation and possible default on its loans, according to legal filings. In March 2023, hospital managers wrote that they had provided detailed information “twice previously” and that “continued harassment on these issues appears to be counterproductive and takes the focus away from getting the job done.”
Seegert responded to the hospital’s CEO and COO 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 guarantors, Cannon Design and the hospital.
The federal legal code requires maintaining litigation during a bankruptcy.
But bankruptcies create special problems in construction contract disputes and often pit the construction team or its guarantors against other creditors in attempts to recover disputed payments.
Looking for quick answers on construction and engineering topics?
Try Ask ENR, our new intelligent AI search tool.
Ask ENR →
when an owner files for bankruptcy protection during a project,”creditors must act strategically—file proofs of claim, seeking relief from the stay if applicable,” to protect your interests in the bankruptcy process, write Husch Blackwell Law Firm attorneys Tara LeDay and Maya Dokic.
In addition to Oroville Hospital, the bankruptcy filing came 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 approximately the same amount as her claim for additional damages and costs. But a federal judge ruled in favor of the hospital, removing the lien on all but a $300,000 portion of the hospital’s assets.
The hospital had been burdened in recent years by the closure of another hospital that was destroyed by a forest fire. The five-story expansion, when it opens, will add 159,000 square feet of space and increase the number of beds from 153 to 211.
Expected fee of $5.9 million
According to Modern-Sundt’s court complaint, the original contract had a guaranteed maximum price of $107.7 million, with the companies collecting a fee of $5.9 million. Change orders and delays, Modern-Sundt alleged, brought the actual price to $130.7 million. At the time of the lawsuit, the owner had withheld $4.7 million in retainage under the contract, the joint venture said.
The original 2019 contract was due to end in 1,096 days from the start of work on 24 April 2019.
In its response to the lawsuit in 2024, before the bankruptcy filing, Oroville Hospital accused Modern-Sundt of failing to complete construction in a timely and competent manner and asserted that it has the right to withhold funds until the work is completed.
The hospital also alleged that it had the right to terminate the joint venture for cause and that Modern-Sundt had effectively abandoned the project, prompting “numerous liens and claims for payment” by subcontractors, “resulting in additional damages” to the owner.
