NYU Hosp. Ctr. v. HRH Constr. LLC (In re HRH Constr. LLC)

• Decision Date: 02 August 2011
• Docket Number: Adv. Pro. No. 10-8242 (SHL),Case No. 09-23665 (RDD)
• Citation: NYU Hosp. Ctr. v. HRH Constr. LLC (In re HRH Constr. LLC), Adv. Pro. No. 10-8242 (SHL), Case No. 09-23665 (RDD) (Bankr. S.D.N.Y. Aug 02, 2011)
• Parties: In re: HRH CONSTRUCTION LLC, et al., Debtors. NYU HOSPITALS CENTER, Plaintiff, v. HRH CONSTRUCTION LLC, Defendant. CURTIS PARTITION CORPORATION, Plaintiff, v. HRH CONSTRUCTION LLC, NYU HOSPITALS CENTER, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

In re: HRH CONSTRUCTION LLC, et al., Debtors.

NYU HOSPITALS CENTER, Plaintiff, v. HRH CONSTRUCTION LLC, Defendant.

CURTIS PARTITION CORPORATION, Plaintiff, v. HRH CONSTRUCTION LLC, NYU HOSPITALS CENTER, et al., Defendants.

Case No. 09-23665 (RDD)

Adv. Pro. No. 10-8242 (SHL)

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

August 2, 2011

Jointly Administered

MEMORANDUM DECISION AND ORDER

APPEARANCES:

HOLLAND & KNIGHT LLP

Attorneys for NYU Hospitals Center

Frederick R. Rohn, Esq.

Henry A. H. Rosenzweig, Esq.

HERRICK, FEINSTEIN LLP

Attorneys for HRH Construction LLC

William R. Fried, Esq.

Kerry K. Jardine, Esq.

KIRSCH GARTENBERG HOWARD LLP

Attorneys for Curtis Partition Corporation

Jesse C. Klaproth, Esq.

SEAN H. LANE

United States Bankruptcy Judge:

This action arises out of a construction contract dispute among debtor HRH Construction LLC ("HRH"), facilities owner NYU Hospitals Center ("NYU"), and sub-contractor Curtis Partition Corporation ("Curtis").¹ NYU claims that HRH breached their contract by failing to proceed with phase 2 of a multi-phased construction project. HRH counters that it was neither required nor able to move forward with phase 2 because NYU failed to meet with HRH, as contractually mandated, to negotiate and resolve outstanding issues, including a plan for the remaining work. HRH also claims that NYU breached the contract by failing to make required payments on approved requisitions. A trial was held on January 5, 6, 7, and 10 before this Court. For the reasons set forth more fully below, the Court finds in favor of debtor HRH and awards damages for three unpaid requisitions.

BACKGROUND

A. Findings of Fact

Pursuant to an agreement dated October 21, 2003, HRH was hired to renovate NYU's existing radiology center in Manhattan (the "Construction Agreement"). Trial Ex. 1. Because NYU wanted the radiology department to remain operational during the renovation, the construction project was to be accomplished in a sequence of phases, with the first phasedesignated as phase 0. Berger Aff. ¶ 8 (Dec. 13, 2010);² Trial Tr. 13:17-21 (Jan. 5, 2011). HRH agreed to complete the work for a guaranteed maximum price of $8,520,000, subject to equitable adjustment by submission of proposed change orders by the contractor for unforeseen conditions arising during the work. Trial Ex. 1, Construction Agreement § 3.6. Over the course of the project, NYU approved change orders in the aggregate amount of $907,447, thereby increasing the guaranteed maximum price to $9,427,447. Trial Exs. 9-13; Berger Aff. ¶ 54; Ross Aff. ¶ 8 (Dec. 13, 2010). As contemplated by the Construction Agreement, HRH entered into several subcontracts, including one with Curtis for work on drywall, carpentry, and acoustical ceilings.³Trial Ex. 1, Construction Agreement § 3.3; Trial Ex. 4; Berger Aff. ¶ 7.

For periodic reimbursement of its costs and expenses, HRH was required to submit requisitions to NYU on a monthly basis. Trial Ex. 1, Construction Agreement § 10.1.1. Each requisition was subject to written approval by NYU before NYU would pay HRH on the requisition. See Trial Ex. 1, Construction Agreement § 10.1.7. NYU was permitted to withhold approval of any requisitions that reflected disputed work. Id. Importantly, NYU was required to approve or disapprove requisitions within twelve business days of receipt. Id.; Trial Tr. 122:25-123:3 (Jan. 5, 2011). If NYU disapproved a requisition or a portion thereof, NYU was required to "prepare and promptly issue" to HRH a written statement describing those items in the requisition that were not approved. Trial Ex. 1, Construction Agreement § 10.1.7. Within thirty days of approving a requisition, NYU was to pay the requisition regardless of whether HRH continued working in the future. Id. at § 10.2; Trial Tr. 122:20-24 (Jan. 5, 2011). See also Trial Ex. 1, Construction Agreement § 13.1; Trial Ex. 3, Completion Agreement ¶ 2(d). Within ninetydays of approval, HRH was to pay any relevant subcontractors like Curtis.⁴ Trial Ex. 4, Subcontract § 10.1(a). According to article 13.1 of the Construction Agreement, "[HRH] shall have no right to suspend all or any part of the Work or to refuse to comply with any written instruction, direction or order of [NYU] pending resolution of any dispute or for any other reason, provided that [NYU] continues to make payments of undisputed amounts as provided in this Agreement." Trial Ex. 1, Construction Agreement § 13.1 (emphasis added).

The construction project encountered delays in 2004 and early 2005. See Berger Aff. ¶ 21; DeCesare Aff. ¶ 19 (Dec. 10, 2010). HRH contends that these delays were due to unanticipated difficulties. For example, while the contract contemplated raising the ceilings in the facility, the ceilings were lowered during construction to increase the area needed for new installations. Fox Aff. ¶ 15 (Dec. 13, 2010). In addition, it is undisputed that NYU failed to make timely payments, which led unpaid subcontractors to neglect their duties. Trial Tr. 111:22-112:5 (Jan. 5, 2011); Fox Aff. ¶¶ 21-23; Trial Exs. 216, 217, 220. See also Trial Ex. 221, units 73.1, 73.3; Egeberg Dep. 158:24-159:25 (May 14, 2007).⁵ NYU counters that the project delays were a result of HRH's inadequate management and supervision of the work. Berger Aff. ¶¶ 23-31; DeCesare Aff. ¶¶ 22-31.

HRH and NYU attempted to resolve their differences by entering into a Completion Agreement dated May 11, 2005.⁶ Trial Ex. 3; Berger Aff. ¶ 32; Ross Aff. ¶ 28. NYU'sattorneys drafted the Completion Agreement at the request of NYU's facilities manager, Mr. Kenneth Egeberg. Egeberg Dep. 163:22-164:2. See also Trial Tr. 123:8-10 (Jan. 5, 2011). Mr. Egeberg understood that the Completion Agreement was intended, at least in part, to give HRH's subcontractors more confidence that NYU would make timely payments going forward. Egeberg Dep. 162:15-163:17. According to Mr. Egeberg, the subcontractors were reducing manpower and/or refusing to work because of NYU's failure to make timely payments as early as May 4, 2005. Id. at 159:16-21. "It was not a new development," Mr. Egeberg explained. Id. at 159:21. Mr. Egeberg testified regarding the purpose of the Completion Agreement:

It was my opinion that the performance of HRH over a sustained period of time was miserable. Equally as miserable was [NYU's] lousy pattern of payment. . . . if we wanted to do anything, to give us any opportunity to get the work done, that we would have to do something to improve the payments dramatically to HRH and that would give us the ability to either keep HRH or consider what the next step should be in dealing with the HRH problem.

Id. at 161:7-162:4.

Under the terms of the Completion Agreement, NYU promised to make payments, on dates certain, of four outstanding requisitions, and HRH promised to achieve "Substantial Completion" of phases 0 and 1 of the construction project by June 15, 2005, which was approximately fifteen months later than originally provided for in the Construction Agreement. Trial Ex. 3, Completion Agreement ¶ 1; Berger Aff. ¶ 20; Trial Ex. 1, Construction Agreement, Ex. C. Substantial Completion is a term defined by the underlying Construction Agreement to reflect NYU's ability to use and occupy an area for its intended purposes. Trial Ex. 1, Construction Agreement § 5.2; Trial Ex. 3, Completion Agreement ¶ 4. The Completion Agreement clarified that Substantial Completion would include "all [w]ork necessary to obtainNew York State Department of Health ('DOH') approval for full use and occupancy of the Phase 0 and Phase 1 areas . . . ." Trial Ex. 3, Completion Agreement ¶ 1.

NYU issued payments to HRH for the four requisitions listed in the Completion Agreement. Trial Exs. 222, 225, 228. While HRH did not achieve Substantial Completion by June 15, 2005, both NYU and HRH agree that Substantial Completion of phases 0 and 1 was reached before the premises were inspected and approved by the Department of Health on June 21, 2005. Trial Tr. 125:9-10 (Jan. 5, 2011); DeCesare Aff. ¶ 36; Trial Exs. 226, 227. While the June 15, 2005 Substantial Completion date was originally scheduled so as to permit an inspection by the Department of Health, the date for such an inspection ultimately proved to be June 21, 2005, a date scheduled at least thirty days prior. See Trial Tr. 91:4-92:3 (Jan. 5, 2011). There is evidence that NYU used some of its own employees to prepare the premises for the inspection. Trial Tr. 125:11-15, 168:18-23 (Jan. 5, 2011); DeCesare Aff. ¶ 35.

Pursuant to the Completion Agreement, following Substantial Completion of phases 0 and 1, NYU and HRH were to "meet (prior to the start of the next phase of the Work) to negotiate and resolve remaining issues between them, including the schedule for completion of the remaining Work." Trial Ex. 3, Completion Agreement ¶ 3. The parties seem to agree that, after Substantial Completion of phases 0 and 1 was reached in June of 2005, little construction work followed. NYU argues that HRH's failure to proceed with the next phase of work—phase 2—constituted the breach of contract that is central to its case. HRH counters by highlighting the language in the Completion Agreement requiring that HRH and NYU first meet to negotiate and resolve remaining issues between them before HRH was to proceed with the work. HRH argues that, despite HRH's good faith efforts to schedule such a meeting, NYU refused to meet, preventing HRH from continuing its work.

On this disagreement, Mr. Egeberg's testimony is particularly useful. He understood that the Completion Agreement required a meeting after Substantial Completion of phases 0 and 1 before HRH could continue with phase 2. He testified: "My view of what was in that payment agreement was that the parties needed to sit down and figure this out. There was no time frame other than as soon as possible for both of us to figure out what we were going to do to continue." Egeberg Dep. 227:10-14 (May 15, 2007).

The parties'...