Tuesday, September 23, 2014

As judge denies Forest City's request to reopen modular factory, contract with Skanska to build B2 terminated; judge orders meeting to resolve control of factory

A state judge today denied Forest City Ratner's request for a court order to reopen the closed modular factory at the Brooklyn Navy Yard, but did order a meeting to hasten the dispute resolution process between estranged partners Forest City Ratner and Skanska.

Justice Saliann Scarpulla, at various times exasperated with each party, urged mediation between the bitter adversaries to resolve differences over running the FCS Modular factory, which could take six months to resolve and form a cloud over attempts to restart the factory, run by both companies, as some of the 157 employees drift away.

Fundamentally, Skanska blames Forest City for huge cost overruns in the stalled and delayed B2 tower, while Forest City blames Skanska's mismanagement of a fixed-price contract. That gap--worth perhaps $50 million--has fueled a series of lawsuits.

"The landscape has changed a little bit today," Skanska lawyer Bruce Meller said at the outset of the 45-minute hearing, held in state Supreme Court in Manhattan.

Skanska Building had terminated its construction management (CM) agreement with Forest City to build B2, and terminated the B2 purchase order to buy modules from the jointly-owned and -operated factory.

Now, he said, Forest City, in the form of the entity known as Atlantic Yards B2 Owner, can present the project back to FCS Modular as a job. So, Meller suggested, Forest City is now capable of restarting the factory and getting all the relief it sought.

"He left something out," countered Forest City lawyer Harold Weinberger, noting that Skanksa would still have leverage via control of intellectual property (IP) related to the project.

Meller later said Forest City could come up with a contract to do work for B2: "If we say no, they do it at their risk and expense."

Resolving the dispute over who runs the modular factory

If that contract was terminated, asked Scarpulla, why were they in court?

Because, said Weinberger, they need to resolve on ongoing contract regarding the limited liability company (LLC) that runs the factory. FCS Modular, while a partnership between Forest City and Skanska, is run by Skanska, with a six-person board split among the two companies and a lengthy process to resolve disputes. 

Ultimately, Scarpulla did not agree that laying off the workers constituted a "Major Decision" according to the LLC agreement, as Forest City had urged. The judge said money damages would be the remedy, especially since there was no work at hand. She didn't buy the argument that losing the workers damaged the overall business, since the contract acknowledged potential for periods of inactivity.

But Scarpulla did give Forest City a smaller win, agreeing was a "Major Decision" for the LLC to change its managing member, and forced Skanska to hold a vote it had otherwise avoided. 

That vote, presumably ending in a 3-3 tie, would trigger a months-long deadlock process contemplated by contract, leading to potential buyout of one or the other's interests.

That, over time, also would jeopardize the modular factory's future, given the need to rehire and/or retrain workers, and further delay the completion of B2.

No wonder Scarpulla several times urged the parties to consider mediation. "I'm not trying to scold anyone," she said. "I'm just saying that the path you're going down is just going to  cost you more money."

The parties gave lip service to the notion of mediation, and Forest City said Skanska previously refused it. But the tenor of previous public statements, as well as those made after the hearing, suggest that mediation would be bumpy.

Forest City, Skanska statements

After the hearing, MaryAnne Gilmartin, President and CEO, Forest City Ratner Companies, made a statement:
“Today Skanska terminated their contracts as construction and factory manager for B2, making clear again that they have no intention of moving this project forward. We believe in modular and have worked tirelessly to get B2 back on track since Skanska blind-sided us by ceasing construction and putting 157 workers on the street last month. Skanska has responded with inaction and inertia, trying to leverage us financially by stonewalling B2's progress. These are deplorable and disappointing tactics that show remarkable indifference to the wellbeing of these workers and the project. We will continue to rigorously pursue our options through the courts to get B2 built."
Skanska USA Building Co-Chief Operating Officer Richard Kennedy pointed out that the 8/8/14 notice to terminate was issued after Skanska had not been able to resolve "significant commercial and design issues," including requests for additional payment, but B2 Owner took no action in response.

His statement:
“Today is an incredibly disappointing day. Our company has a long history of working with our clients through all kinds of challenges so, at the end of the day, we deliver the best product possible to our clients and the communities in which we live and work. In New York alone, we have worked on some of the city’s most iconic structures and with each of those projects, we have finished the job. While the B2 project certainly has its issues, we were hopeful that our client and partner would address them so we could move forward with building much-needed affordable housing in Brooklyn. But we could not continue to incur millions of dollars in extra costs with little hope that Forest City would take responsibility for fixing the significant commercial and design issues on the project. We pride ourselves on being an innovative company and we will continue to build using prefab and modular techniques to move the construction industry forward. This issue will not deter us from continuing on that journey of innovation.”
Argument in court

Weinberger, seeking to have the judge force the reopening of the factory, said Forest City wanted to be placed in the position it would have been had Skanska not breached the contract.

"How are they going to be paid if they're not working?" asked Scarpulla.

Weinberger said the joint venture would pay them.

Scarpulla suggested that money damages would be sufficient.

Weinberger said it wasn't so much an issue of wages as the viability of the modular company. "The longer it goes on, the business that we have is going to disappear."

"You're saying I should force the LLC to pay them?" the judge asked.

"I'm asking to be put back" in the earlier position, Weinberger responded.

"What if I just order a board meeting?" Scarpulla asked.

Weinberger said that Forest City had tried to replace Forest City as a managing member, but the vote went 3-3.

"You're taking the position that a change in the managing member is not a major decision," Scarpulla asked Meller incredulously.

"It was not a proper resolution for the board," he said. When Scarpulla asked the question again, he said, "I don't think so."

What happens, asked Scarpulla, if she called a vote.

It would trigger a deadlock process that could take five or six months, Weinberger said.

"That's what the parties anticipated," the judge said. "I think what I might do is enforce the agreement."

Weinberger, however, argued that if the dispute had gone to court in August, before the factory shut down, the status quo of an operating factory would have been preserved.

Why won't damages cover the losses, asked the judge.

The damages, he repeated, regarded the viability of the LLC. "We have a technology that's very new. This is the first project," he said, adding, in an understatement, " It's not working out very well."

He also suggested that having the workers in place would expedite whatever resolution is at hand, presumably because both companies would be paying their salaries. Delay, he said, is on the side of Skanska.

That, Scarpulla said, represents what the parties bargained for.

"Please, really, consider mediation," she said at one point. "This is something that should not drag on."

More coverage

Note: several Forest City executives, including CEO MaryAnne Gilmartin, were in court.

No other reporters were there, but, after press releases were issued, coverage emerged, including:
--Crain's New York Business, Skanska cancels Atlantic Yards contract
--Daily News, Construction company building world’s tallest modular tower in Brooklyn terminates contract amid dispute with developer Bruce Ratner
--Curbed, Skanska Terminates Contract for Atlantic Yards Tower B2
--Bloomberg BusinessWeek, Skanska Quits Brooklyn Prefabricated Apartment Project

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