Oroville Hospital: $196M Tower Never Opened, Bond Sweep Triggers Chapter 11

Oroville Hospital, a 63-year-old nonprofit healthcare system serving rural Butte County, California, filed for chapter 11 protection on December 8, 2025, after bond trustee UMB Bank swept $27.1 million from hospital accounts and triggered a liquidity crisis. The filing represents a cautionary tale of capital project risk in healthcare: a $196 million expansion tower completed in March 2025 has never opened, while the hospital faces nearly $17 million in unpaid contractor claims and approximately $195 million in accelerated bond debt.

The case quickly became notable for an unusual DIP financing showdown. When the hospital presented a third-party DIP proposal from Rosemar Management, Judge Christopher M. Klein characterized the terms as "very onerous" with "0% chance" of court approval, leading the prepetition bondholder to offer competing financing that prevailed within a single day. UMB Bank's counsel crystallized the likely outcome: "This is a sale case, not a restructuring case."

Case Snapshot

Company Background and History

Oroville Hospital was founded in 1962 as a modest community hospital with a small medical staff, located approximately 70 miles north of Sacramento in Northern California. Over six decades, the nonprofit system evolved into Butte County's only acute care provider, now employing approximately 150 physicians and serving a community designated by California's Department of Health Care Access and Information as a "Health Professional Shortage Area."

The hospital operates as a subsidiary of OroHealth Corporation, a nonprofit corporation. In 1985, the system began establishing outpatient physician practices, eventually expanding to 18 practices throughout Butte County with a medical staff encompassing more than 200 physicians. The Lown Institute ranked the hospital number four nationally and number one in California for social responsibility, recognizing its community mission despite chronic financial challenges.

System Facilities and Operations

FY 2024 Service Volume:

The hospital's revenue mix exposes it to the structural challenges facing many California rural hospitals: approximately 81% of revenue derives from government payors—Medi-Cal and Medicare—resulting in chronic underpayment relative to cost of care. The nearest 24-hour full-service emergency room is a 35-45 minute drive from Oroville Hospital, making the facility critical for emergency healthcare access throughout the region.

Regional Context: The Camp Fire's Long Shadow

The hospital's service area was forever altered by the 2018 Camp Fire, the deadliest and most destructive wildfire in California history. The fire, caused by failed PG&E transmission line hardware, began on November 8, 2018, causing 85 fatalities, displacing more than 50,000 people, destroying over 18,000 structures, and inflicting an estimated $16.5 billion in damage—making it the world's costliest natural disaster that year.

The fire devastated Paradise and surrounding communities, destroying Feather River Hospital along with five public schools, a rest home, and churches. The destruction of Feather River Hospital consolidated regional healthcare demand on Oroville Hospital during years of subsequent financial strain, adding operational pressure without corresponding revenue increases from the heavily government-payor population.

Path to Bankruptcy: The Tower That Never Opened

$196 Million Bond Issuance and Tower Construction

In February 2019, Oroville Hospital issued approximately $196 million in municipal revenue bonds through the City of Oroville as conduit issuer to construct a five-story, 165,000-square-foot expansion tower. The project would expand acute care capacity from 133 to 211 beds—a 59% increase designed to serve the growing regional demand amplified by the Camp Fire's destruction of nearby healthcare facilities.

Project Timeline and Delays:

The COVID-19 pandemic created supply chain disruptions that pushed the original April 2022 completion date to fall 2022, then November 2023. Oroville Mayor Chuck Reynolds cited pandemic-related supply issues as primary drivers of the early delays.

Contractor Disputes and Litigation

Construction on the tower was substantially completed around January 2024, but the building remained closed pending California state regulatory approvals. Meanwhile, Modern-Sundt—the construction joint venture between Chico-based Modern Building and Tempe-based Sundt Construction—filed a $16.9 million lawsuit in Butte County Superior Court in March 2024 seeking unpaid contractor fees.

Construction Cost Escalation:

In August 2025, the hospital amended its cross-complaint to add Cannon Design as a cross-defendant, asserting design-related claims as part of the multifaceted construction dispute. As of October 2025—eighteen months after construction completion—the tower still had no opening date, with the hospital continuing to await California state approvals that never came.

Technical Default and Covenant Violations

In 2023, the hospital fell short of its annual debt-service coverage ratio covenant, pushing the revenue bonds into technical default. The covenant breach triggered a cascade of consequences: bond documents provided UMB Bank, as Master Trustee, with remedies including fund sweeps and acceleration.

By October 2025, UMB Bank determined the hospital had defaulted on the $195.63 million bond obligation and issued a notice of acceleration, demanding full repayment. The hospital contended it had an understanding with the master trustee that excess reserve funds would be applied to debt service, but UMB applied only a portion before withholding the remainder.

October 2025 Fund Sweep: The Liquidity Crisis

On October 1, 2025, UMB Bank as Master Trustee executed a fund sweep, applying $27,102,995.55 held in trust accounts against bond obligations. This action stripped the hospital of critical operating reserves accumulated for the tower project, immediately creating a liquidity emergency.

Impact of Fund Sweep:

The fund sweep's timing was particularly devastating because the hospital relied on those reserves for ongoing operations while awaiting the tower's regulatory approval. Court testimony revealed the immediate consequences: vendors ceased providing services and demanded cash in advance for critical supplies, including chemotherapy drugs and insulin. Medical device vendors attempted to withhold surgical equipment needed for scheduled procedures.

Pre-Bankruptcy Sale Attempts

In November 2025, the hospital announced it was seeking partnership with or sale to a larger healthcare organization, retaining Cain Brothers—a division of KeyBanc Capital Markets specializing in healthcare investment banking—to advise on the affiliation process. The sale effort came as the hospital faced simultaneous pressure from UMB Bank's bond demands and Modern-Sundt's ongoing $16.9 million construction litigation.

Bloomberg Law reported the hospital ultimately filed for bankruptcy "after failing to sell itself or secure affiliation with larger hospital system"—a pattern increasingly common among rural healthcare providers unable to achieve prepetition transactions with strategic buyers who often prefer to acquire assets through bankruptcy's liability-shedding mechanisms.

Chapter 11 Filing and DIP Financing Battle

Filing and First Day Relief

Oroville Hospital and OroHealth Corporation filed chapter 11 petitions on December 8, 2025, seeking to facilitate a sale transaction while preserving healthcare operations. The hospital announced all facilities—including the acute care hospital, skilled nursing facility, clinics, and related services—would remain open during the chapter 11 process.

First Day Motions Filed:

The U.S. Trustee filed objections to several first day motions, raising concerns about automatic stay relief provisions with five-day cure periods, DIP lender liens on avoidance action proceeds, professional fee carve-outs, and releases of claims against the lender—standard institutional creditor protections that drew regulatory scrutiny.

The Unusual DIP Financing Showdown

The case featured an extraordinary DIP financing competition between a third-party lender and the prepetition bondholder—a dynamic rarely seen in hospital bankruptcies where secured creditors typically control the process from filing.

Original Proposal - Rosemar Management:

Kane Brothers, working as investment banker, led what was described as an exhaustive DIP lender search before recommending Rosemar Management as the best available option. However, Judge Klein's reaction at the First Day Hearing was immediate and unequivocal. The court characterized the Rosemar terms as "very onerous" and stated there was "0% chance of approving a budget that included a line item for professional fees escrowed at this stage."

The court's skepticism extended to questioning whether the Rosemar transaction was truly arm's-length—a significant concern given the debtor's vulnerability and the urgency created by vendor flight.

Approved Proposal - UMB Bank Bondholder DIP:

Following the court's rejection of Rosemar, UMB Bank—represented by Greenberg Traurig—presented a counter-proposal within hours. The bondholder DIP offered superior economics: lower interest rates that capitalize rather than requiring current cash payments, no commitment fee, and funding partially from the $24 million previously swept from hospital accounts.

The agreement was reached during a reconvened hearing lasting just 16 minutes, demonstrating how practical urgency overrode legal positioning when the hospital was projected to "run out of money by the following Wednesday."

Vendor Flight During Crisis

Court testimony from the First Day Hearing documented the operational crisis facing the hospital:

• Vendors ceased providing chemotherapy drugs and insulin
• Medical device vendors attempted to withhold surgical equipment
• Suppliers demanded cash in advance for critical supplies
• The hospital projected running out of operating cash within five days of filing

The vendor behavior reflects a broader pattern in healthcare bankruptcies where suppliers—themselves often operating on thin margins—rapidly shift to cash-in-advance or refuse service entirely when a hospital enters distress. This dynamic accelerates the crisis and increases urgency for DIP financing approval.

Largest Creditors and Capital Structure

Secured Debt

The First Day Hearing revealed lien complexity that even the parties had not fully understood: Tri Counties Bank was unaware of UMB's blanket lien claim, creating potential priority disputes regarding the $2.6 million deposit account collateral securing Tri Counties' $1.6 million claim.

Largest Unsecured Claims

False Claims Act Settlement: A $10 Million Prelude

Just twelve months before bankruptcy, in December 2024, Oroville Hospital agreed to pay $10.25 million to resolve False Claims Act and Anti-Kickback Statute allegations with the U.S. Department of Justice. The settlement addressed claims that the hospital paid kickbacks to physicians for patient admissions and submitted false claims for medically unnecessary services between January 2013 and July 2023.

False Claims Settlement Breakdown:

The hospital entered a five-year Corporate Integrity Agreement with HHS-OIG while making no admission of wrongdoing. The whistleblower, Cecilia Guardiola, had filed the original qui tam lawsuit in August 2020. The $10.25 million outflow—just a year before the liquidity crisis—further strained finances already pressured by tower construction costs and government reimbursement shortfalls.

Industry Context: Rural Hospital Crisis

Oroville Hospital's bankruptcy reflects broader challenges facing California's rural healthcare infrastructure, with the case embodying virtually every major stressor affecting the sector.

Rural Hospital Closures: A National Crisis

According to Chartis Group's 2025 Rural Health analysis, more than 40% of the 432 vulnerable rural hospitals face immediate closure risk. The combination of negative operating margins, workforce shortages, and capital needs creates conditions where even well-intentioned operators struggle to maintain viability.

Healthcare Sector Bankruptcy Trends

The Gibbins Advisors analysis identifies rising labor costs as the "single biggest driver" in hospital revenue issues, with healthcare sector unemployment at just 2.6% as of December 2024. According to NSI Nursing Solutions data, labor costs now account for approximately 60% of hospital budgets, increasing by $42.5 billion industry-wide between 2021 and 2023. Hospitals now spend over $60,000 to replace a single registered nurse, while nearly 40% of nurses intend to leave the profession by 2029.

California-Specific Challenges

The state's regulatory environment creates additional pressures for rural hospitals like Oroville:

Medi-Cal Reimbursement: While January 2024 brought the largest Medi-Cal provider rate increases in state history, rural health clinics are not eligible for targeted rate increases that bring payments to at least 87.5% of Medicare rates. Oroville's heavy reliance on government payors (81% of revenue) means these gaps directly impact operating margins.

Seismic Compliance: California's SB 1953 requires all general acute care hospitals to meet seismic strengthening requirements by January 1, 2030, or cease operations. Approximately 470 general acute care hospital facilities with 2,673 buildings face compliance requirements, creating significant capital demands for systems already struggling financially.

Medicaid Cuts: According to the California Health Care Foundation, California faces $27 million in sequestration cuts to rural hospitals. Many rural providers are already in precarious financial condition, and even the $50 billion Rural Health Transformation Fund will offset only one-third of projected $137 billion in cuts.

Provider Shortages: The California Department of Health Care Access and Information (HCAI) identified Butte County as having low physician supply, with the hospital's service areas designated as Health Professional Shortage Areas. Approximately 30-40% of physicians serving Oroville Hospital live outside the area—in Sacramento, Roseville, Rocklin, and Lincoln—creating recruitment and retention challenges.

Critical Physician Retention: The Anesthesia Emergency

The chapter 11 case immediately confronted a staffing crisis requiring extraordinary first day relief. Court filings revealed the hospital has only one anesthesiologist on staff, making retention of Certified Registered Nurse Anesthetists (CRNAs) and Certified Registered Nurse First Assistants (CRNFAs) critical to continued surgical operations.

Physicians were owed approximately $8.4 million in prepetition compensation, and multiple amended orders addressed payment conditions to prevent mass departures that would effectively shut down surgical services. The court granted interim authority to prioritize these payments, recognizing that loss of anesthesia capability would eliminate the hospital's ability to perform surgeries—a core revenue-generating service.

Professional Retentions

Other Key Parties

The California Attorney General's presence reflects the state's regulatory authority over nonprofit hospital transactions. Under California Corporations Code Section 5914, nonprofit hospitals must obtain Attorney General written consent before selling material assets, with the AG authorized to approve, deny, or condition any sale or change of control. This adds a regulatory overlay to the sale process that strategic buyers must navigate.

Key Timeline

Implications for Healthcare Stakeholders

For Rural Hospital Operators

Oroville Hospital's trajectory illustrates the compound risks of major capital projects in rural healthcare. The tower expansion—designed to address legitimate capacity needs—became a liability when construction delays prevented the revenue generation needed to service bond debt. The case underscores the importance of construction contingencies, delay provisions, and realistic assumptions about state regulatory timelines when structuring healthcare capital projects.

For Municipal Bond Investors

The case demonstrates the enforcement tools available to bond trustees when healthcare debtors breach covenants. UMB Bank's October 2025 fund sweep—while contractually authorized—immediately triggered the liquidity crisis that led to bankruptcy. Bondholders face a choice between rigorous covenant enforcement that may precipitate chapter 11 and forbearance that may delay inevitable restructuring while assets deteriorate.

For Healthcare Acquirers

UMB Bank's characterization of this as "a sale case, not a restructuring case" signals the anticipated path forward. Strategic buyers will evaluate Oroville Hospital's assets—including the never-opened tower—against the regulatory complexity of acquiring a California nonprofit healthcare provider. The Attorney General's oversight authority adds transaction risk and timeline uncertainty that sophisticated buyers will price into bids.

For Healthcare Regulators

The tower's prolonged regulatory approval process contributed to the hospital's distress by delaying the revenue generation needed to service bond debt while construction costs accumulated. The case may prompt examination of whether approval timelines for hospital expansion projects appropriately balance patient safety with operational viability.

Frequently Asked Questions

What is Oroville Hospital?

Oroville Hospital is a 63-year-old nonprofit healthcare system serving Butte County in Northern California, operating a 133-bed acute care hospital, 126-bed skilled nursing facility, 31 clinics, and 23 outpatient lab locations approximately 70 miles north of Sacramento. Founded in 1962, the hospital is the region's only acute care provider and serves an area designated as a Health Professional Shortage Area.

Why did Oroville Hospital file for bankruptcy?

The hospital filed after bond trustee UMB Bank swept $27.1 million from hospital accounts on October 1, 2025, declaring default on approximately $195 million in revenue bonds issued to construct an expansion tower. The tower was completed in March 2025 but has never opened due to pending California state approvals, leaving the hospital unable to generate expected revenue while facing accelerated debt obligations.

What happened to the tower expansion project?

The hospital issued $196 million in municipal bonds in 2019 to build a five-story, 165,000-square-foot expansion tower that would increase capacity from 133 to 211 beds. Despite construction completing in March 2025, the tower has never opened due to pending California state regulatory approvals. The project also faces $16.9 million in unpaid contractor claims from Modern-Sundt.

Will Oroville Hospital remain open during bankruptcy?

Yes, the hospital announced all operations—including the acute care hospital, skilled nursing facility, clinics, and related services—will remain open during the chapter 11 process. The court approved interim DIP financing and first day relief to ensure continued patient care.

Who is providing DIP financing?

UMB Bank, acting on behalf of bondholders, is providing $40 million in DIP financing. The facility comprises $24 million from previously swept funds that are being returned plus $16 million in new bondholder money. The court rejected a competing proposal from Rosemar Management that Judge Klein characterized as "very onerous."

Is this a sale or restructuring case?

UMB Bank's counsel explicitly characterized this as "a sale case, not a restructuring case," indicating the expected outcome is a sale to a healthcare acquirer rather than emergence as an independent reorganized entity. The hospital previously attempted but failed to secure an affiliation or sale prepetition.

What was the False Claims Act settlement?

In December 2024—just twelve months before bankruptcy—Oroville Hospital agreed to pay $10.25 million to resolve allegations of kickbacks to physicians and false billing between 2013 and 2023. The settlement included a five-year Corporate Integrity Agreement with HHS-OIG. Whistleblower Cecilia Guardiola received approximately $1.8 million.

How did the Camp Fire affect Oroville Hospital?

The 2018 Camp Fire—California's deadliest and most destructive wildfire—destroyed nearby Feather River Hospital in Paradise, concentrating regional healthcare demand on Oroville Hospital. The fire caused 85 fatalities, displaced over 50,000 people, and destroyed more than 18,000 structures, fundamentally reshaping the regional healthcare landscape.

What are the largest creditor claims?

The largest claims include: UMB Bank (~$195-208 million in bond debt), California Department of Health Services ($26.7 million+), Modern-Sundt construction contractor ($16.8 million+), Change Healthcare ($15.4 million+), U.S. Department of Justice ($9.5 million+), and Cardinal Health ($2.4 million+).

When is the final DIP hearing?

The final hearing on DIP financing and cash collateral is scheduled for January 12, 2026. The hospital's schedules deadline was extended to January 22, 2026.

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