In key preliminary ruling, judge rejects some Skanska arguments in dispute with FCR over modular factory

B2 from Flatbush Avenue

Forest City Ratner has won what seems a significant preliminary victory in one legal battle over its ill-fated partnership with Skanska USA to build the world's tallest modular tower.

The decision does not resolve any of the three pending cases, but does show a judge rejecting some Skanska arguments.

Among them: the claims that Forest City had promised to build the first three Atlantic Yards towers using modular techniques and that the Opportunity Brief, a business proposal from Forest City, made binding promises.

That judge, state Supreme Court Justice Saliann Scarpulla, is hearing all the cases, which face a 10/19/16 hearing.

Both Forest City and Skanska, when queried, declined comment.

For the 461 Dean Street tower flanking the Barclays Center, aka B2, Skanska USA agreed to fabricate, deliver, and erect the modules, and perform construction management services.

Skanska USA then hired FC+Skanska Modular (now FC Modular) to supply modules at fixed price of $31.4 million. Skanska Modular served as manager of the company, based at the Brooklyn Navy Yard. The goal: a revolutionary example of high-rise, modular construction.

Bitter dispute

Forest City had publicly said it aimed to build the entire project via this purportedly cost-saving technology, but B2, which broke ground in December 2012, took far longer than the two years announced. The new Greenland Forest City Partners joint venture, led by Shanghai-based Greenland Holdings, in 2014 decided to build the next towers conventionally.

In early September 2014, after Skanska closed down the factory at the Brooklyn Navy Yard, both Forest City and Skanska filed dueling lawsuits, blaming the other partner for causing delays and cost overruns. Indeed, 461 Dean will take nearly twice the time and cost far more than expected.

Skanska blamed a Forest City affiliate, the Atlantic Yards B2 Owner, for providing an inadequate design and an insufficient factory, among other things. It sought at least $50 million in damages. Forest City's affiliate blamed Skanska for breaching the parties' Construction Management and Fabrication Services Agreement (aka CM Agreement), causing delays and cost overruns.

Those cases remain pending, and the latest decision does not directly affect them, but Scarpulla's reasoning could have an impact.

Breach of contract

This latest decision regards a breach of contract suit filed in September 2014 by FCRC Modular against Skanska Modular, one-time partners in the factory. (Forest City bought out Skanska in November 2014 and later reopened the factory on its own to finish the tower.)

Forest City said Skanska Modular, led by President Richard Kennedy, unilaterally decided to shut down the factory, violating the parties' LLC Agreement. Forest City sought to have the factory reopened--which is now moot--and be awarded monetary damages and attorney's fees. Skanska said the B2 owner could have cured the various defaults on its side.

In response to Forest City's suit, Skanska Modular and Kennedy asserted 19 affirmative defenses, eight counter-claims and third-party claims. The judge agreed to dismiss all of the counter-claims--though perhaps left Skanska an opportunity to refile one of them.

But the judge dismissed only one of the affirmative defenses, which presumably sets up future battles in court.

The arguments, and the decision

For example, in its counter-claims, Skanska charged that Forest City failed to provide a sufficient capital contribution, factory, and labor pool, and provided defective and deficient intellectual property.

Justice Scarpulla agreed with Forest City that the LLC Agreement specified only that FCRC Modular was required to contribute the transfer of intellectual property, to negotiate a lease, and a collective bargaining agreement.

Skanska also asserts a breach of contract based on the Opportunity Brief Forest City circulated to prospective partners. But judge called the argument "meritless" because the brief was not a contract but a business proposal.

Skanska also charged that Forest City made false representations in the Opportunity Brief to induce it to enter into the LLC Agreement, including that there was a built-in pipeline of future towers, and that the modular design would be cost-effective. The LLC Agreement, the judge wrote, would rule.

Skanska alleged that Forest City repudiated its obligation by deciding that the modular company would not receive the contract to build two additional towers around the arena. The judge said that FCRC Modular was not bound by that pledge.

Additionally, the LLC agreement provided that such contracts would come only after completion and construction of B2, with certain leasing targets for it met, as well as financing targets for B3. So it seems Forest City would win on the merits.

In response to Forest City's request to recover $1.5 million paid to settle claims of furloughed workers, Skanska blamed Forest City for failing to negotiate a collective bargaining agreement that would permit the company to furlough workers. The judge agreement that the LLC Agreement contained no requirement for such a provision.

What's next?

Could Skanska open up its claims? The judge noted that "standard integration clauses" in the LLC Agreement and CM Agreement do not preclude Skanska Modular's reliance on representations outside of the agreement.

But she found that Skanska failed to state a claim against Forest City for fraudulent or negligent misrepresentation because such claims require more specificity. So I suspect that could leave open the possibility that Skanska re-files such claims.

Also, while Forest City moved to dismiss Skanska Modular and Kennedy's affirmative defenses, which blamed Forest City for negligence and the failure to mitigate production problems, the judge agreed that only one of those affirmative defenses was without merit.

So that suggests that, however many Skanska arguments were easily shut down, others will be further ventilated in court.

Going after third parties

Also, Skanska made some over-reaching claims that suggest the intensity of the dispute. Kennedy alleged that Forest City authorized publication of a press release that contained false and defamatory statements about him.

Forest City said the statement was a fair and true report of a judicial proceeding, and the judge agreed, noting that no facts backed the allegation that this was a malicious act.

Skanska and Kennedy also tried to get Forest City's p.r./lobbing firm Berlin Rosen and partner Greenland Holdings found in contempt, to produce documents, and pay attorney's fees.

The judge called the motion versus Greenland moot because she dismissed the counterclaims regarding alleged promises that the B3 and B4 towers would be built modularly. And she denied the motion against Berlin Rosen after denying the counter-claim regarding the press release.

FCR Skanska Modular Case Motion Decision 8/4/16 by AYReport on Scribd