Monday, July 27, 2015

In modular tower dispute, judge mostly rejects Forest City effort to narrow Skanska's case for damages

Ruling in the preliminary stages of a bitter legal battle, state Supreme Court Justice Saliann Scarpulla rejected most of Forest City Ratner's efforts to narrow one of the three lawsuits between it and Skanska USA regarding their ill-fated and now dissolved partnership over the delayed modular tower known as B2.

Forest City Ratner and its affiliate Atlantic Yards B2 Owner aimed to get most of Skanska's lawsuit dismissed before the case moved further toward trial. The decision (see bottom), dated 7/16/15 and released on 7/20/15, mostly favored Skanska, although it's still early in the process and does not portend an ultimate victory. Forest City did win on a few arguments.

Neither side publicized the decision, perhaps because neither could claim unambiguous good news. But I suspect that had Forest City won more, given its aggressive press strategy, it would have pitched the news to a receptive reporter.

The background

Skanska agreed to lead the fabrication of the modules for B2, slated to be the world's tallest modular tower, and to construct the building, the first of what was purported to be a 100% modular buildout for the full Atlantic Yards project. A company affiliate, Skanska Modular, partnered with FCRC Modular, a Forest City affiliate to form FC+Skanska Modular, to build the modules.

After cost overruns, delays, and warnings about defects, Skanska closed the factory in August 2014, to Forest City's protest, with B2 having risen only about one third of the planned 32 stories. Forest City has since reopened the factory under its own management and is completing the building, which it owns 100%, after buying out partner Arizona State Retirement System.

However, Greenland USA, the new majority owner of the remaining Atlantic Yards/Pacific Park project, has decided that the next buildings would be built conventionally. Only after B2 is completed will we see whether the factory at the Brooklyn Navy Yard is used for other project buildings or other buildings in New York City.

Efforts to narrow the case rejected

The defense aimed to partially dismiss Skanska USA Building's second and third causes of action, as well as parts of the first cause of action. The first two causes of action each sought $30 million in damages.

In the first cause of action, Skanska claimed that the B2 Owner breached the Construction Management Agreement (CM Agreement) in seven ways, including by providing an incomplete design, failing to make timely payments, and failing to provide a factory and factory workers with sufficient skills. The defense argued that five of the seven breaches should be dismissed.

Regarding the alleged breach regarding insufficient and incorrect design, Forest City claimed the charges were vague. Scarpulla wrote that Skanska did provide sufficient specifics and that, contra Forest City's claim that Skanska waived any chance to protest against defects, the B2 Owner had agreed it would be liable to increased costs resulting from design flaws.

Scarpulla did not, however, grant Skanska's opposing request for summary judgment regarding these issues, instead leaving them for future court motions and a potential trial.

Regarding the alleged breach regarding the failure to issue change orders or directed changes for additional work or costs, Scarpulla agreed that the request for dismissal was "procedurally premature."

Regarding the alleged breach regarding Forest City's failure to make financial arrangements to fulfill its obligations, "B2 Owner fails to conclusively demonstrate that it provided financial assurances," wrote the judge, again leaving the issue for future legal jousting.

Efforts to narrow the case accepted

Regarding the alleged breach in failing to post a bond, the judge agreed that, in this case, there was no contractual provision that requires B2 Owner to comply with the Lien Law.

Regarding the alleged breach in failing to deliver a sufficient factory and labor force in a timely manner, B2 Owner cited a union agreement and a lease--and the judge agreed that the CM Agreement does not require a timely factory and adequate workforce.

Another route to damages OK so far

In the second cause of action, Skanska again charged  that it hadn't been paid on time and that B2 Owner had failed to issue change orders and pay for increases in costs caused by the owner.

The defense argued that this should be dismissed as duplicative, while Skanska said that this was an alternate theory, seeking common-law damages rather than those based on contract terms. The judge agreed that it was not entirely duplicative and did not dismiss it.

Piercing the corporate veil

In the third cause of action, Skanska aimed to "pierce the corporate veil," arguing that Forest City and its affiliates controlled B2 Owner, while that entity has no assets from which it can pay a judgment.

The judge denied Forest City's motion to dismiss, noting that Skanska showed that B2 Owner and other Forest City entities had overlapping ownership, personnel, and addresses.

 "Using underfunded subsidiaries or related single-purpose entities as a shield from liability arising from a construction contract is conduct that may support a claim for piercing the corporate veil," Scarpulla wrote.

Forest City keeps defense counsel

Skanska unsuccessfully tried to disqualify the defense counsel Troutman Sanders, saying that the firm represents another subsidiary of Skanska USA, Skanska Civil Southeast. According to the Rules of Professional Conduct, the judge wrote, a lawyer must get consent to represent a party adverse to the corporation's affiliates only when that affiliate "should also be considered a client of the lawyer."

Skanska and Skanska Civil, wrote Scarpulla, "do not have such an overlapping structure that Skanska should be considered a client of Troutman." For example, they have separate presidents and separate general counsels. There was no evidence that Troutman's role representing the Skanska affiliate could yield secrets related to the Skanska-Forest City dispute, she wrote.

Skanska also said the representation was adverse to a Skanska Civil director, Richard Kennedy, who is a defendant in a related suit filed by Forest City against Skanska. Troutman is not formally  involved in that case, but Skanska alleged that the firm is collaborating with the counsel of record, Kramer, Levin. The judge did not directly address that allegation but subsumed it, apparently, under her overall ruling regarding the issue of representation.

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