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State Court of Appeals backs Forest City over Skanska in one stage of dispute regarding modular tower

In a decision yesterday, the state Court of Appeals backed Forest City New York (formally, its affiliate Atlantic Yards B2 Owner) in one stage of a long-running dispute with former partner Skanska USA Building over the ill-fated modular apartment tower, 461 Dean, aka B2.

Skanska was hired to build the tower and also formed a joint venture with Forest City to operate the modular factory at the Brooklyn Navy Yard. The parties dispute the cause of delays, with Skanska blaming Forest City's design, and Forest City blaming Skanska's execution.

The building, for which ground was broken in December 2012, didn't start accepting residents for nearly four years. Forest City gave up ambitious plans to build more towers via modular technology and wound up selling the factory and selling the building--the only tower it owned in full. (The other three are owned by the joint venture Greenland Forest City Partners.)

The ruling bolstered Forest City but did not resolve the overall case, which could involve tens of millions of dollars in damages for cost overruns; the Court of Appeals agreed a lower court properly dismissed Skanska's claim of a breach in the Construction Management and Fabrication Services Agreement (aka the CM Agreement). The alleged breach was a failure to comply with the state's Lien Law.

Convoluted structure

The case was complicated by the convoluted contractual structure regarding Atlantic Yards/Pacific Park. Empire State Development (ESD), the state authority which approved Atlantic Yards but which was not a party to the case, entered into a Development Agreement with an affiliate of the B2 Owner and then leased the site flanking the Barclays Center to another Forest City affiliate.

Skanska was not a party to either the Development Agreement or the Lease Agreement, both of which required the Tenant to follow the state Lien Law. According to the lease, Forest City Enterprises--the parent of Forest City Ratner/Forest City New York and a minority owner of B2 Owner--signed a completion guaranty with ESD.

Skanska and B2 Owner separately entered into the CM Agreement, with the former to be paid about $116 million to build the tower. After the deadline to finish the tower passed, Skanska told B2 Owner it would cancel the agreement, asserting that, among other things, B2 Owner breached the CM Agreement by failing to post a bond, thus violating the Lien Law.

Lawsuit

The two parties, or affiliates, are involved in three ongoing lawsuits, which may ultimately be resolved together. Skanska's lawsuit alleged, in part, that B2 Owner was required under the Lien Law to post a bond guaranteeing payment to the contractor, subcontractors, and workers/suppliers. A lower court, the Appellate Division, agreed with the B2 Owner on this issue, but was split.

The Court of Appeals decision noted: "Unlike the Development and Lease Agreements—to which plaintiff is not a party—the CM Agreement contains no express provision requiring compliance with the Lien Law." While Skanska argued that the Lien Law should be “read into” the CM Agreement, the Court of Appeals disagreed, saying that wasn't specified.

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