Skanska USA Building Inc. v. Atlantic Yards B2 Owner, LLC

OPINION OF THE COURT

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 plaintiffs interpretation that Lien Law § 5 is satisfied by *5the 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 Bar-clays 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 *6B2 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 Skan-ska, 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 [ajffiliates.” 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 *7days 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.

*8Defendants 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 the ground of conflict of interest, inasmuch as Troutman represented two of plaintiff’s affiliates in matters in Maryland and Florida. Plaintiff added that Troutman’s representation of Forest City was adverse to the interests of one of its affiliate’s directors, who was a named defendant in a related action in Supreme Court, New York County, brought by FCRC Modular.

Court’s Decision on the Motion

The motion court dismissed subpart (f) of the first cause of action, which alleges that defendants breached the CM Agreement by failing to post a bond required under Lien Law § 5, and subpart (h), which alleges breach of the CM Agreement based on an inadequate factory and inadequate labor (2015 NY Slip Op 31258[U] [2015]).

The motion court denied defendants’ motion to dismiss subparts (a) and (b) of the first cause of action, which alleges breach of contract due to design defects, as well as subpart (c), which alleges breach of the parties’ CM Agreement by improperly changing the scope of work. It also declined to dismiss the third cause of action, which seeks to pierce the corporate veil of defendants and their affiliates, and denied plaintiff’s motion to disqualify Troutman.

Analysis

Lien Law § 5

Plaintiff argues that the text and legislative history of Lien Law § 5 demonstrate that Forest City Ratner Companies, LLC was required to post a bond to guarantee B2 Owner’s performance under the CM Agreement. We disagree. Far from *9supporting plaintiff’s argument, the statute’s legislative history indicates that no bond — as opposed to some other sort of “undertaking,” such as a guarantee — was required to be posted here.

Lien Law § 5, entitled “Liens under contracts for public improvements,” provides, in relevant part:

“Where no public fund has been established for the financing of a public improvement with estimated cost in excess of two hundred fifty thousand dollars, the chief financial officer of the public owner shall require the private entity for whom the public improvement is being made to post, or cause to be posted, a bond or other form of undertaking guaranteeing prompt payment of moneys due to the contractor, his or her subcontractors and to all persons furnishing labor or materials to the contractor or his or her subcontractors in the prosecution of the work on the public improvement” (emphasis added).

The statute dates back to the former Lien Law of 1897. Prior to 2004, the statute left a “gap,” in that contractors working on projects being built by private developers, with private funds, but on public land, could not file liens against the public land or the private entity’s leasehold interest (see Matter of Paerdegat Boat & Racquet Club v Zarrelli, 57 NY2d 966 [1982], revg for reasons stated at 83 AD2d 444, 449-452 [2d Dept 1981, Hopkins, J., concurring in part, dissenting in part]; Plattsburgh Quarries v Markoff, 164 AD2d 30, 32 [3d Dept 1990], lv denied 77 NY2d 809 [1991]).

In 2004, the legislature acted to fill this gap by enacting the language highlighted above. This provides for the public owner, in the case of large private development projects on public land, to “require the private entity for whom the public improvement is being made to post, or cause to be posted, a bond or other form of undertaking guaranteeing prompt payment of moneys due to the contractor ... in the prosecution of the work on the public improvement” (L 2004, ch 155, § 1).

The crux of plaintiff’s position is that the guarantee provided in this case does not comply with the law because it is not equivalent to a bond or “other form of undertaking” under the statute.

A statute, however, is to be construed so as to give meaning to each word (see McKinney’s Statutes § 231). Black’s Law Dictionary defines an “undertaking” first as “[a] promise, *10pledge, or engagement,” and second as “[a] bail bond” (Black’s Law Dictionary 1665 [9th ed 2009]). Similarly, the CPLR defines “Undertaking” first as “[a]ny obligation, whether or not the principal is a party thereto, which contains a covenant by a surety to pay the required amount, as specified therein, if any required condition ... is not fulfilled” (CPLR 2501 [1]). Hence, an “undertaking,” as distinct from a “bond,” is simply a “formal promise [or] guarantee” (Black’s Law Dictionary 1665 [9th ed 2009]).

That the legislature intended the term “undertaking” in Lien Law § 5 to mean a “guarantee” is strongly supported by the statute’s legislative history, which indicates that the Governor vetoed an earlier version of the 2004 amendment that added the above quoted language because the earlier version would have required the posting of a bond in every instance, disallowing “other forms of security designed to guarantee payment” (Letter from Assembly Sponsor, July 8, 2004, Bill Jacket, L 2004, ch 155 at 5). The senate sponsor of the amendment clarified that the phrase “or some other form of undertaking” was added to meet the Governor’s concerns by providing “an alternative to posting a bond” (Letter from Senate Sponsor, July 15, 2004, Bill Jacket, L 2004, ch 155 at 3).

As defendants point out, ESDC met its obligations under the statute by causing a Forest City affiliate — Forest City Enterprises, Inc. — to issue a formal “Guaranty” that B2 Owner would “cause Substantial Completion of the Improvements and perform the Development Work,” including “to fully and punctually pay and discharge any and all costs, expenses and liabilities incurred for or in connection with the Guaranteed Work, including, but not limited to, the costs of constructing, equipping and furnishing the Guaranteed Work” (emphasis added). This guarantee follows the letter of the statute, namely “guaranteeing prompt payment” to contractors. That there are better guarantees available, such as a letter of credit, as the dissent notes, is beside the point. ESDC, as the public owner, was satisfied with the guarantee issued by Forest City Enterprises, Inc. Certainly, if the legislature had wanted the guarantee to be on par with a letter of credit it could have said that or identified the various types of guarantees that would satisfy the statute.

Since plaintiff is seeking only to force defendants to post a bond under Lien Law § 5, we need not decide whether it would have standing to enforce the guaranty as against Forest City Enterprises, as a third-party beneficiary.

*11Breach of Contract

Factory Facility and Labor

The motion court erred in dismissing subpart (h) of the first cause of action, which alleges breach of the CM Agreement based on an inadequate factory and inadequate labor. Plaintiff plausibly argues that the CM Agreement, particularly when viewed together with the parties’ related and contemporaneously executed LLC and IP Transfer Agreements (see BWA Corp. v Alltrans Express U.S.A., 112 AD2d 850, 852 [1st Dept 1985]), required B2 Owner to ensure that an adequate modular factory and factory labor force were in place before it issued the Notice to Proceed. Thus, the allegations that the factory and labor force were inadequate, causing project delays, adequately state a claim for breach of the CM Agreement.

Modular Unit Design Defects

The motion court upheld the claim that defendants breached the CM Agreement by providing defectively designed modular unit technology. Defendants argue that this claim is refuted by documentary evidence. Defendants’ argument lacks merit.

CM Agreement § 5.4 (b) (ii) defines an “Owner-Caused Event” as including “fault, neglect or other negligent or wrongful act or failure to act by [B2] Owner’s . . . Design Professionals.” The CM Agreement makes clear that defendants designed the modular unit technology. Indeed, B2 Owner expressly represented that its professionals designed the modules and they were “sufficient for completion of the Work.” Plaintiff alleges that the modular units, designed by defendants or their agents, were defective. Plaintiff thereby states a claim for breach of the CM Agreement.

Defendants’ main argument is that plaintiff failed to provide timely notice as required to assert a claim for design defect under section 3.5 of the LLC Agreement, i.e., by December 7, 2012. However, the parties appear to have contemplated that such flaws could be identified after December 7, 2012. Indeed, while B2 Owner represented in the CM Agreement that the design was sufficient, it further agreed that any design defects would be “Owner-Caused Events.” Certainly, there is tension between these provisions — as there is also with the disclaimers of warranties to which defendants point. However, such facial conflicts present questions of fact that are not suitable for resolution on this pre-answer motion to dismiss.

*12Changes to Scope of Work

The motion court upheld the claim that defendants breached the CM Agreement by changing the scope of work without issuing appropriate change orders. Defendants argue that plaintiff waived this claim by failing to comply with the CM Agreement’s notice provisions governing change orders.

The parties agree that plaintiff’s compliance with the change order notice provision was a condition precedent to the assertion of a claim for unauthorized changes in the scope of work. However, the CPLR does not require a party asserting a contract claim to plead compliance with a condition precedent (CPLR 3015 [a]). Instead, it is incumbent upon the party resisting the contract claim to plead the failure to comply with the condition precedent (id.). Given defendants’ failure to plead, the motion court correctly declined to dismiss the breach of contract claims.

Piercing the Corporate Veil

Veil-piercing is a narrowly construed doctrine limiting “the accepted principles that a corporation exists independently of its owners . . . and that it is perfectly legal to incorporate for the express purpose of limiting the liability of the corporate owners” (Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135, 140 [1993]). The party seeking to pierce the corporate veil bears the heavy burden of “showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury” (id. at 141; Sheridan Broadcasting Corp. v Small, 19 AD3d 331, 332 [1st Dept 2005]).

Here, plaintiff sets forth conclusory allegations merely reciting typical veil-piercing factors (see e.g. Brainstorms Internet Mktg. v USA Networks, 6 AD3d 318 [1st Dept 2004]). It does not allege any fraud or malfeasance to support its attempt to reach Forest City or other third-party defendants. It alleges breach of contract claims against B2, but “a simple breach of contract, without more, does not constitute a fraud or wrong warranting the piercing of the corporate veil” (Bonacasa Realty Co., LLC v Salvatore, 109 AD3d 946, 947 [2d Dept 2013]).

Far from alleging that Forest City used B2 Owner to perpetrate a fraud, plaintiff, a sophisticated party, admits that it knowingly entered into the CM Agreement with B2 Owner, *13an entity formed to construct the project. Nowhere in the complaint does plaintiff allege that it believed it was contracting with or had rights vis-a-vis Forest City or any entity other than B2 Owner. Indeed, plaintiff could have negotiated for such rights. Having failed to do so, plaintiff cannot now claim that it was tricked into contracting with B2 owner only and thus should be allowed to assert claims against Forest City (see Spectra Sec. Software v MuniBEX.com, Inc., 307 AD2d 835, 835 [1st Dept 2003]; Hillcrest Realty Co. v Gottlieb, 208 AD2d 803, 805 [2d Dept 1994]; see also Brunswick Corp. v Waxman, 599 F2d 34, 36 [2d Cir 1979]). Thus, the veil-piercing claim should be dismissed.

Attorney Disqualification

A movant seeking disqualification of an opponent’s counsel faces a heavy burden (see Ullmann-Schneider v Lacher & Lovell-Taylor PC, 110 AD3d 469 [1st Dept 2013]). A party has a right to be represented by counsel of its choice, and any restrictions on that right “must be carefully scrutinized” (id. at 469-470 [internal quotation marks omitted]). Courts should also examine whether a motion to disqualify, made in ongoing litigation, is made for tactical purposes, so as to delay litigation and deprive an opponent of quality representation (see Solow v Grace & Co., 83 NY2d 303, 310 [1994]). The decision whether to grant a motion to disqualify rests in the discretion of the motion court (see Macy’s Inc. v J. C. Penny Corp., Inc. 107 AD3d 616 [1st Dept 2013]).

Skanska USA Civil Inc. (Skanska Civil) is a wholly owned subsidiary of Skanska USA Inc. Plaintiff is likewise a wholly owned subsidiary of Skanska USA. Skanska Civil holds entities which work in various regions of the United States, including Skanska USA Southeast Inc. (Skanska Southeast). Neither Skanska Southeast’s Virginia litigation nor its Florida and Maryland transactional matters have any relationship to, or involve any of the same adverse parties as, the instant action. Nor does plaintiff allege that any of Troutman’s Forest City litigation team members possesses any of plaintiff’s confidential information, or that the ethical screen that Troutman has set up between its Forest City and Skanska attorneys is in any other way inadequate.

The motion court therefore providently exercised its discretion in denying plaintiff’s motion to disqualify the law firm. Plaintiff has not shown that, standing alone, Troutman’s repre*14sentation of corporate affiliates of plaintiff and adversity to one of the directors of one of plaintiff’s affiliates creates a conflict of interest (see Rules of Professional Conduct [22 NYCRR 1200.0] rules 1.7 [a]; 1.13 [a]).

We have considered the parties’ remaining arguments for affirmative relief and find them unavailing.

Accordingly, the order of the Supreme Court, New York County (Saliann Scarpulla, J.), entered July 20, 2015, which, insofar as appealed from as limited by the briefs, granted the motion of defendants B2 Owner and Forest City to dismiss subparts (f) and (h) of the first cause of action and denied the motion to dismiss subparts (a), (b) and (c) of that cause of action and the third cause of action, and denied plaintiff’s motion to disqualify the law firm of Troutman Sanders LLP as said defendants’ attorneys, unanimously modified, on the law, to deny the motion to dismiss subpart (h) of the first cause of action, and to grant the motion to dismiss the third cause of action, and otherwise affirmed, without costs.