Skanska USA Bldg. Inc. v. Atl. Yards B2 Owner, LLC

• Decision Date: 20 October 2016
• Parties: SKANSKA USA BUILDING INC., Plaintiff–Appellant–Respondent, v. ATLANTIC YARDS B2 OWNER, LLC, et al., Defendants–Respondents–Appellants, ABC Companies, LLC, et al., Defendants. Associated General Contractors of NYS, LLC, Amicus Curiae.
• Court: New York Supreme Court — Appellate Division

146 A.D.3d 1

40 N.Y.S.3d 46

2016 N.Y. Slip Op. 06903

SKANSKA USA BUILDING INC., Plaintiff–Appellant–Respondent,

v. ATLANTIC YARDS B2 OWNER, LLC, et al., Defendants–Respondents–Appellants,ABC Companies, LLC, et al., Defendants.Associated General Contractors of NYS, LLC, Amicus Curiae.

Supreme Court, Appellate Division, First Department, New York.

Oct. 20, 2016.

Peckar & Abramson, P.C., New York (Bruce D. Meller and Peter E. Moran of counsel), for appellant-respondent.

Kramer Levin Naftalis & Frankel LLP, New York (Harold P. Weinberger, Nathan M. Hammeerman and Kaavya Viswanathan of counsel), and Troutman Sanders LLP, New York (Lee W. Stremba, Aaron Abraham and Kevin P. Wallace of counsel), for respondents-appellants.

Couch White, LLP, Albany (Jennifer K. Harvey and Joel M. Howard, III of counsel), for amicus curiae.

ROLANDO T. ACOSTA, J.P., DAVID B. SAXE, JUDITH J. GISCHE, TROY K. WEBBER, MARCY L. KAHN, JJ.

ACOSTA, J.P.

This case gives us the opportunity to interpret the language of Lien Law § 5, which provides that a private developer on public land must post a bond or other undertaking guaranteeing prompt payment to the contractor. We also address piercing the corporate veil in litigation involving sophisticated entities, as well as several breach of contract claims and attorney disqualification. These issues arose in the context of construction litigation between plaintiff and its affiliates, an international construction conglomerate, and defendants Atlantic Yards B2 Owner LLC (B2 Owner) and Forest City Ratner Companies, LLC (Forest City) and their affiliates, the developers of the Atlantic Yards project in Brooklyn. Specifically, the litigation revolved around the construction of a high-rise residential tower called “B2.” B2 was to be built using innovative prefabricated modular units developed by defendant Forest City that would then be stacked together by plaintiff to form the high-rise. For the reasons stated below, we decline to adopt plaintiff's interpretation that Lien Law § 5 is satisfied by the posting of a bond only and not a guarantee as was done here. We also find that plaintiff failed to plead a veil-piercing claim. As the facts show, both parties were very sophisticated, and negotiated in minute detail all aspects of their agreements to build B2 using innovative technology. That the project failed does not lead to a veil-piercing claim, especially since plaintiff failed to identify the alleged fraud or other wrongdoing. We also reinstate the claim based on inadequate factory and labor, and decline to disqualify one of defendants' law firms based on a conflict of interest.

Background

In July 2006, the Empire State Development Corporation (ESDC), a state actor, adopted a plan for the Atlantic Yards Land Use Improvement and Civil Project, a 22–acre mixed-use development project in Brooklyn, to be anchored by the Barclay Center sports arena. As part of this project, in March 2010, ESDC entered into an interim lease agreement with AYDC Interim Developer, LLC, an entity affiliated with defendant B2 Owner, for construction of a number of buildings near the Barclays Center sports arena.

One of these buildings, the B2 Residential Project (B2 Building), was a proposed 34–story residential building containing 350 units. The B2 Building was to be erected with innovative modular construction, i.e., assembled pre-manufactured modular units. The modular construction concept was based on proprietary technology and design developed by defendant Forest City, also an affiliate of B2 Owner.

Forest City invited plaintiff, an international construction conglomerate, to participate in establishing a factory to construct the modules near the B2 site, and then to assemble the modules into the B2 Building. In June 2012, plaintiff and FCRC Modular, LLC (a Forest City affiliate) entered into a “Contract for Module Fabrication and Testing Services” (the Testing Agreement). The Testing Agreement contemplated a joint effort by plaintiff and the Forest City entities to build and test the modular units to be used in the B2 Building, with the goal of entering into a joint venture for construction of a full-blown modular factory facility.

On October 31, 2012, affiliates of plaintiff and Forest City executed three agreements in furtherance of the B2 Project. FCRC Modular, Skanska Modular, LLC (a daughter company of plaintiff), together with (as to certain portions) plaintiff and B2 Owner, entered into an “LLC Agreement” establishing FC+Skanska Modular, LLC (FC Skanska), to build and operate the modular factory. The LLC Agreement was, in sum, a joint venture among the parties, wherein Forest City affiliates supplied the modular unit intellectual property (including the fruits of the Testing Agreement), plus some capital, and plaintiff's affiliates supplied capital and construction know-how. The LLC Agreement made Skanska Modular the managing member for purposes of day-to-day operations.

On the same day, FCRC Modular, Skanska Modular, and FC Skanska entered into an “Intellectual Property Transfer and Development Agreement” (IP Transfer Agreement), which conveyed the modular IP and fruits of the Testing Agreement to FC Skanska.

Finally, also on October 31, 2012, plaintiff and B2 Owner entered into a “Construction Management and Fabrication Services Agreement” (the CM Agreement). The CM Agreement provided for plaintiff to enter into a subcontract with FC Skanska, under which FC Skanska would supply the modular units and plaintiff would effect the assembly, in exchange for a contract price of $116,875,078.

Among its other provisions, the CM Agreement called for the B2 Project to be substantially completed 416 business days after B2 Owner issued a “Notice to Proceed.” In the CM Agreement, plaintiff represented that it had conducted due diligence and had no reason to believe that the modular design was inadequate or would not permit construction as provided for in the CM Agreement. On the other hand, the CM Agreement recited that plaintiff could “rely upon and use” in its performance “information supplied to it by or on behalf of [B2] Owner and its [a]ffiliates.” The CM Agreement further stated that plaintiff was “not responsible for defects and/or deficiencies in the Work attributable to [its] reliance upon any such information that is incorrect, inaccurate or incomplete,” and provided further that plaintiff would “notify [B2] Owner promptly of any inaccuracies in such information ... so as to minimize potential delays.”

The CM Agreement contemplated changes to the schedule for “Force Majeure Event [s],” “Owner–Caused Event[s],” and “Contractor–Caused Delay[s].” Plaintiff was entitled to extensions of time for Force Majeure and Owner–Caused Events, but only if it gave written notice within five days of its actual knowledge of the event, followed by a second notice within 45 days after the end of the event (or the initial notice). Moreover, time extensions were only available for events that “adversely impact[ed] activities on the critical path” of the construction schedule. The CM Agreement similarly provided for plaintiff to receive additional payment for Force Majeure or Owner–Caused Events if it gave timely notice.

B2 Owner could also request or direct changes in the scope of work. Either plaintiff or B2 Owner could terminate the CM Agreement for cause. B2 Owner could also terminate the CM Agreement for convenience. B2 Owner issued the Notice to Proceed on December 14, effective December 21, 2012. The deadline for substantial completion was July 25, 2014.

By a 146–page letter dated August 8, 2014, plaintiff gave B2 Owner notice of its intent to terminate the CM Agreement on account of dozens of alleged Force Majeure and Owner–Caused Events and other breaches. The letter specified 12 alleged periods of delay, each lasting between one week and as much as five months. Plaintiff attributed the delays to delays in the factory fit-out (i.e., the time to get the modular factory up and running); defects in Forest City's modular unit design technology; related negligence and failure to cooperate by B2 Owner's design professionals; and improper changes to the scope of work made by B2 Owner without the requisite change orders. Plaintiff also alleged that Forest City had breached the CM Agreement's requirement that it provide evidence of satisfactory financing for the project by, among other things, failing to post a bond required by Lien Law § 5. Plaintiff alleged that it had suffered damages in excess of $50 million.

On August 27, 2014, plaintiff stopped work on the project and shortly thereafter notified B2 Owner that the CM Agreement was terminated.

Complaint & Dismissal Motion

Plaintiff commenced this action asserting causes of action for breach of the CM Agreement. It claimed that defendants had breached the CM Agreement by, among other things, providing a defective design for the project, including an inadequately designed modular factory facility with inadequate labor, changing the project scope without issuing change orders, and failing to provide adequate security as required by the Lien Law. Plaintiff also asserted a cause of action alleging that B2 Owner was a mere alter ego of Forest City, and seeking to pierce Forest City's corporate veil. Plaintiff sought damages of at least $30 million.

Defendants moved pursuant to CPLR 3211(a)(1) and (7) to dismiss the veil-piercing cause of action, as well as certain parts of plaintiff's breach of contract claims, including the claims that defendants violated Lien Law § 5, supplied a defectively designed modular factory and inadequate factory labor, and changed the project scope without appropriate change orders.

Plaintiff opposed the motion and cross-moved pursuant to CPLR 3211(c) for partial summary judgment on the issue of defendants' liability on the Lien Law § 5 claim.

Attorney Disqualification Motion

Plaintiff also moved to disqualify the law firm Troutman Sanders LLP (Troutman) as defendants' attorneys, on...