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October 31, 2011

The secret history of Forest City's prefab plans: partner modular firm charged with sneaky business, but settlement resolves lawsuit; case file reveals threat by FCR exec

Atlantic Yards Report

Norman Oder has a fascinating exclusive on the back story to Forest City Ratner's exploration of modular building techniques for Atlantic Yards. Biggest non-surprise: FCR dancing around shady dealings and legal action.

The first third of this article describes the outline of the story; the rest delves into further depth. The article is based on my reading of the case file in the lawsuit described below (Kullman Buildings Corp. vs. XSite Modular), as well as additional comments from architect James Garrison.

I contacted Forest City's spokesman this morning to ask for comment on behalf of the company and its partner XSite and was told, "As of now, they will not comment." I will post updates should they develop.

Developer Forest City Ratner’s ambition to build modular towers at record-setting heights, which could make Atlantic Yards profitable and launch a new prefab business, has provoked curiosity, speculation, and concern since reports of such plans surfaced in March 2011.

After all, with modular construction, Forest City might cut costs and construction time considerably. Atlantic Yards, now likely to take decades, could be completed closer to the long-promised ten-year schedule, albeit with question marks about its durability, diminished spending on jobs, and lowered tax revenues.

And, previously unreported, the modular venture has a contentious, litigious history, which for months slowed Forest City's efforts.

Today, while Forest City still faces challenges to go modular, including union negotiations and investment to start a factory, it has cleared a major hurdle.

By virtue of a legal settlement in August involving its business partner, FCR gained the expertise and financial terms it sought for assistance "in the development and implementation of a system and methodology of designing, manufacturing, and constructing modular" high-rise buildings "in a cost effective manner."

The charges in the lawsuit, aired in numerous legal papers, were settled before adjudication, thus leaving the full story ambiguous. The judge did issue two temporary restraining orders, lending some credence to the plaintiff's claims of potential harm caused by FCR's partner, whose legal defense the developer apparently funded.

The essence of the lawsuit

From Forest City's perspective, it was trying to negotiate the right transaction with the right partner, figuring out how to build 35-story-plus towers at a time when the tallest modular building rises only 25 stories. (The taller the building, the more complex the challenge, given wind and seismic stresses.)

To the Kullman Buildings Corp., which lost a potential contract and apparently has since gone out of business, Forest City benefited from its partner's alleged sneaky tactics.

As Kullman alleged in its lawsuit, FCR "was effectively able to circumvent Kullman's refusal to turn over the ownership rights in this system by the fact that Kullman's key employees collaborated a plan to work directly with FCRC under the formation of a new rival company."

Kullman not only refused to give up some rights to proprietary technology, it sought a royalty rate higher than Forest City would pay, and its CEO sought to change another key contract feature.

Forest City ceased negotiations and soon signed a contract with a new firm, XSite Modular, which agreed to a deal with different contours, including a lower price and less control of intellectual property than Kullman had sought.

XSite is staffed by former Kullman employees recruited by the recently-fired Kullman second-in-command, even as at least one was participating in communications on behalf of the firm regarding the Forest City contract.

Kullman sued XSite and six employees. The defense, denying the allegations, pointed out that employees had not signed non-compete agreements and that Kullman had failed to identify specific proprietary technology.

While the plaintiff's claims likely overreached--if Forest City had already decided to drop Kullman, could the defendants have caused the loss of that future contract?--Kullman argued that the defendants, among other things, faced a common-law duty not to act against the interests of their employer while still working there.

Forest City was not named in the suit, nor did it provoke the formation of XSite. Still, FCR played a key role, supplying testimony and, according to documents in the suit, agreeing to pay the defendants' legal fees.

Click thru for the full story.


Posted by eric at October 31, 2011 2:17 PM