Tuesday, September 23, 2014

Before hearing today on effort to reopen modular factory, more bitter arguments between Skanska and Forest City

As a hearing this morning approached on Forest City Ratner's lawsuit to reopen the modular factory producing modules for the stalled B2 tower at Atlantic Yards/Pacific Park, more legal filings yesterday detailed the increasingly acrimonious relationship between Forest City and Skanska Building, and their respective affiliates.

(See bottom for an organizational chart of all the parties involved, which include various corporate alter egos.)

Increasing contention

An affidavit from Skanksa's Richard Kennedy details an increasingly contentious relationship regarding blame for the delay in producing modules, including a "vulgar street epithet" from Bruce Ratner:
In early 2014, Skanska Building attempted to engage in constructive conversations with Forest City to resolve issues. Forest City's responses ranged from hostile to inattentive and accusatory. For example, at a meeting on January 28, 2014 when William Flemming, the President of Skanska Building, mentioned that design issues existed, Bruce Ratner's response was to use a vulgar street epithet followed by "I don't care if it costs you fifty million to finish the project ... I'll see you at the grand opening." 
(Did Ratner say "bullshit"--generally termed a "barnyard epithet"--or something else?)

Mike McNally, President of Skanska USA later phoned Forest City CEO MaryAnne Gilmartin, who, according to Kennedy, "was less than pleasant, if not rude." McNally then sent a conciliatory email:
I am very sorry that our conversation went so poorly.
Our team has been focused on finding solutions to increase module production in the factory and have developed several scenarios to complete the project following different production strategies, each of which carries a different anticipated TCO date. It is my understanding that we have shared these with FCR along with the potential financial impact of each scenario.
I believe it is important to state that Skanska wants to continue to work with FCR in a productive and proactive way to tackle the challenges we face and to resolve them in a way that achieves what I believe to be our organizations' common goal of building a successful modular building business and to complete B2 as quickly and economically as possible. And again, I regret our conversation did not conclude on a more positive note.
McNally pointed to "certain root causes" attributable to Forest City, such as an incomplete design for B2, an incorrect estimate of labor productivity, and a flawed module fabrication plan.

While Skanska could, according to its contract, "can stand our ground and insist that all of the costs be paid by FCR," McNally suggested a compromise, aiming to finish the project as quickly and inexpensively as possible.

Thus Skanska would "consider an equitable proposal for funding project costs that will exist through Project completion," then sort out each party's claims. However, according to Kennedy, "McNally's email was met with an aggressive, adjective-filled rebuff the next day."

Next modular buildings?

Beyond the construction questions, Skanska was blindsided by plans announced this past April by the new Forest City Ratner/Greenland Group partnership to build the next towers conventionally.

Kennedy asked Forest City's David Berliner to confirm whether any of the three new residential buildings referenced in a New York Times account were B3 or B4 at the arena site, each mentioned as part of the potential future pipeline in the FC Skanska LLC agreement.

"As you know, B3 and B4 were fundamental to our venture and explicitly formed the basis of Skanska's multi-million dollar investment in our modular business," Kennedy wrote.

But the commitment wasn't firm, given the delay in B2. According to the LLC Contract, the B3 contract for modular construction was predicated on having at least 100 (of 182) of the market-rate units getting leased, that the B3 Owner could get non-recourse financing "on commercially reasonable terms," and the total cost estimate "provides for a commercially reasonable profit for the B3 Owner."

Berliner responded that Forest City was obligated by the Development Agreement signed with the Empire State Development Corporation to start a third building by May 2015, but the delay meant that Forest City was not in a position to evaluate "whether the conditions specified in the Operating Agreement will or can be satisfied," including market-rate units leased, as well as a cost estimate for B3.

"In sum, the delays in the Factory have made it impossible to evaluate, let alone meet, the requirements for awarding it a modular construction contract for B3," wrote Berliner.

He noted that Forest City had promoted modular: "However, with delays that have caused the construction lender for B2 to stop funding, the Factory is not currently in a position to demonstrate such success."

Skanska framed another version of the grievance, citing the Opportunity Brief, as Kennedy wrote:
I am compelled to comment on your characterization below of our FC+S venture as involving a "modular technology experiment". This is a far cry from the definitive representations made by multiple Forest City representatives on multiple occasions over multiple months regarding Forest City's multi-year, multi-million dollar effort that led to it developing the "modular solution" that served as the basis for our negotiations leading to the creation of FC+S and execution of the Atlantic Yards B2 Contract. In this connection I refer you to Bruce Ratner's pronouncement in a November 27, 2012 New York Times article that Forest City had "cracked the code" with respect to modular, Forest City CEO MaryAnne Gilmartin seconded this, saying: "We've cracked a code that will allow us to utilize cutting-edge technology to introduce greater affordability, more sustainability and world-class architecture."
Not only were the factory workers unnerved by the announcement of Forest City's changed plans, so too was supplier Banker Steel "expressing anxiety" regarding Skanska's plans.

"Accordingly, the pipeline of work promised by Forest City in its January 6, 2012 Opportunity Brief and identified in Section 4.1 of the LLC Agreement as part of FCRC Modular's capital contribution to FC+S, no longer appears to exist," Kennedy wrote. (The Opportunity Brief actually refers to both a "pipeline" and a "potential pipeline.")

Losses, and conflicts

Meanwhile, the managers Forest City placed at FCS Modular, "through remiss or intention" did not ask to be paid for additional work caused by design errors or changes, according to Kennedy.

The affidavit, as well as other legal papers, describes a dispute about whether B2 Owner--the entity managed by Forest City--had the resources to fulfill its obligations to Skanska. While Forest City indicated corporate resources, Skanska did not find that acceptable, as no bond as required by Lien Law § 5 was posted.

As Skanska's multi-million dollar loss "continued to escalate," and with no evidence of commitment to pay, it told B2 it would stop work, and then furlough workers, and terminate the Construction Management and Fabrication Services (CM) Agreement.

Skanska and Forest City are in a bitter dispute about whether Skanska was permitted to proceed unilaterally or whether the board of FCS Modular, with three seats for each company had to weigh in.

Reopening the factory?

As noted by the organizational chart, FCS Modular is one of many subcontractors performing work for Skanska Building for B2.

The CM Agreement does not allow B2 to obtain an assignment of Skanska's subcontracts upon a termination for cause, which means, according to Kennedy, that even if Forest City were to prevail and get the current employees back to work while running the factory itself, "there will be no work to perform."

Moreover, Banker Steel, the fabricator and supplier of the chassis/frames, has been directed to stop work by Skanska Building under its subcontract, as have M.G. McGrath, Inc., the façade subcontractor, the mechanical subcontractor and the Simplex system subcontractor.

Skanska suggests there's a remedy: Forest City/B2 could "relet contracts and seek to have FC+S enter into an agreement with the new party constructing the Project... If Skanska Modular declines, FCRC Modular may pursue the opportunity individually, subject to the terms of the LLC Agreement."

Legal arguments

Skanska's lawyers take aim at the affidavits from community supporters of Forest City, writing:
In this third action, Plaintiffs Complaint and current application is long on theater, buyer's remorse and animus, yet short on substance, contractual support or legal precedent. Among the ten affidavits submitted by Plaintiff, nine of those Affiants have no knowledge of any of the facts which are relevant to this action or the two pending related actions. The tenth affidavit from MaryAnne Gilmartin is the subject of substantial dispute.
The alleged "buyer's remorse" refers to clauses in the LLC Agreement that Skanska's lawyers said give them the ability to furlough workers during an "Inactivity Period."

By contrast, Forest City says a "preliminary injunction is needed urgently" because Skanska acted wrongfully and unilaterally:
The Company’s cessation of work, the loss of specially-trained union laborers and the closure of the Factory are irreparably harming FCRC Modular. FCRC Modular is seeking injunctive and related relief to restore the status quo that existed immediately before defendants’ improper conduct.
Forest City says Skanska Building, parent company of Skanska Modular, refuses to accept contractual responsibility for cost overruns, and thus has blamed B2 Owner.

According to Forest City, among the Major Decisions that require Board approval are those that would “effect any material changes in the Business or the strategic direction of the Company that are not specified in an Annual Business Plan approved by the Board.” Instead, the LLC Agreement indicates a  “Deadlock” period and then a “Buy-Sell Option” to buy each other out.

Forest City says the work stoppage "jeopardizes the viability of the Project as a modular building and, with it, the entire business of the [modular] Company.... If B2 BKLYN is not completed as modular construction, the practicality of modular construction, and therefore the need for a modular factory business, will have been called into question."

Skanska has pointed out that, by designating the next buildings as conventional, the practicality of modular construction already has been called into question.

No comments:

Post a Comment