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Environmental Barrier Company, LLC v. Slurry Systems

September 29, 2006

ENVIRONMENTAL BARRIER COMPANY, LLC, PLAINTIFF,
v.
SLURRY SYSTEMS, INC., DEFENDANT.



The opinion of the court was delivered by: Rebecca R. Pallmeyer United States District Judge

Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

In this action, Plaintiff Environmental Barrier Company, LLC ("EBC") seeks confirmation of an arbitration award that it won in a construction contract dispute with Slurry Systems, Inc. ("SSI"). The arbitrator, Judge Franklin Kral, determined that SSI, the prime contractor in an environmental construction project, owed $388,919.88 plus arbitration costs to EBC, the successor in interest to a subcontractor on that project. For the reasons that follow, the court grants EBC's motion and confirms the arbitration award.

BACKGROUND

A. The Subcontract

On February 29, 2000 the U.S. Army Corps of Engineers ("COE" or "Owner") contracted with SSI ("Contractor") for work on the Chicago Underflow Plan McCook Reservoir Overburden Groundwater Cut-Off Wall, a project that involved the construction of a multi-billion gallon reservoir, intended to reduce flooding during heavy rains. SSI was tasked to construct the overburden cutoff wall, one of several major components of the overall project. SSI, in turn, subcontracted part of the project to Geo-Con, Inc. ("Geo-Con" or "Subcontractor"). Under the subcontract, Geo-Con was responsible primarily for removing sludge and constructing the cutoff wall. As is explained below, EBC, the party seeking confirmation of the award, was not a party to this contract.

SSI entered into a Standard Form of Agreement with Geo-Con on April 21, 2000 (the "Agreement"). The Agreement provided, inter alia, that "Any claim arising out of or related to this Subcontract" shall be subject to arbitration. (Standard Form of Agreement Between Contractor and Subcontractor, Ex. 2 to Brief in Support of Motion to Vacate or, in the Alternative, to Modify Arbitration (hereinafter "Agreement"), Article 6.2.1.) The contract defined the scope of the work Geo-Con was to perform for each part of the project. In addition to responsibilities for other aspects of the project, Geo-Con was responsible for 62.4% of the costs associated with the construction of the cutoff wall, the most expensive part of the project. In total, based on the original scope of the project, Geo-Con was to contribute 58% of all direct project costs.*fn1 (Award at 2.)

In relation to payment, the contract provided that Geo-Con would recover its expenses and would share in the profit (or loss) that SSI earned on the project: "Total Subcontractor Sum will be equal to the total subcontractor's direct costs as defined below plus 58% of the total net profit of the Prime Contract. In the case of a total net loss of the Prime Contract, the total Subcontractor Sum will be equal to the total subcontractor's direct costs less 58% of the total net loss of the Prime Contract." (Agreement, Attachment A, Article 10.1.) The parties were to provide invoices to each other and keep records of their itemized direct costs on a weekly basis. In case the original project grew in cost and/or size, the contract provided: "Towards the end of the project, based on the actual distribution of direct costs, some adjustments may be required for the final few progress payments to correct for final Subcontract Sum." (Id.)

The scope of the project did in fact increase significantly due to the need for rock chiseling to key the slurry wall into competent bedrock. (Award at 5.) Geo-Con was unable to reach an appropriate depth for the project using the initial construction methods, and the project was delayed while the COE decided how to proceed. Later, the COE approved a demonstration section to evaluate an alternative method, and eventually approved the construction of a rock "keyway"to secure the cutoff wall. According to SSI, Geo-Con bid $8.49 per square foot to perform the necessary chiseling work. (Memorandum in Opposition to EBC's Motion to Confirm Arbitration Award, at 5.) Throughout the project, SSI submitted payment requests to the COE, referred to as "draws," and the COE paid the draws intermittently. In total, SSI received more than $10,500,000 from the COE. (Award at 3-4.) As contemplated by the Agreement, representatives of SSI and of Geo-Con met regularly to track costs, and SSI made progress payments from its draws to Geo-Con, to cover costs and profits. After work had been completed and a final inspection was made, the last such meeting occurred on April 14 and 15, 2003. (Id. at 5.) Because there were several change orders pending at the time of that final meeting, the parties were unable to reach a final settlement. (Id.) The change orders shifted each party's contribution to the total project cost: Under the original Agreement, Geo-Con was responsible for approximately 58% of the direct costs (and apparently entitled to 58% of the profits), but the change orders reduced Geo-Con's proportion of direct costs significantly. (Id. at 3-5.)

B. Geo-Con's Bankruptcy

On September 30, 2003, Geo-Con filed a voluntary petition for reorganization in the United States Bankruptcy Court for the Southern District of New York. At the time of filing, Geo-Con believed SSI owed it at least $711,335, the precise amount being dependent on the settling of change orders which had not yet been processed by the COE. (Id. at 4-5.) This figure was based on the initial profit allocation for the entire project of 58%.*fn2

On April 16, 2004, Judge Adlai Hardin of the New York Bankruptcy Court authorized EBC to assume Geo-Con's subcontract with SSI (the "Order"). (In re Castlton Excavating, Inc., Invatech Inc., Geo-Con Inc., No. 03-B-23649, -23650, -23652 (Bankr. S.D.N.Y. April 16, 2004), Ex. 30, in Support of Brief in Opposition to EBC's Motion to Confirm Arbitration Award (hereinafter "Order").) On April 29, pursuant to the bankruptcy court's Order, EBC and Geo-Con executed a Bill of Sale that provided: "Seller [Geo-Con] does hereby sell, transfer, assign and vest in Buyer [EBC], its successors and assigns forever, all of its right, title and interest in and to all assets of Seller, free and clear of all liens, claims and encumbrances . . . ." (Bill of Sale from Geo-Con to EBC, Ex. 32 to Brief in Opposition to EBC's Motion to Confirm Arbitration Award (hereinafter "Bill of Sale"). The McCook project was listed as one of several "accounts receivable and contracts to be assumed" by EBC. (Id.) Schedule D to the Bill of Sale further stated that all contracts for services were specifically excluded from the sale, but went on to list a number of contracts for services not excluded from the sale. That list includes project P90099, the contract for work at McCook. The court concludes, therefore, that both the account receivable and the contract for service itself were transferred to EBC as part of this assignment.

By letter dated June 17, 2004, EBC demanded payment from SSI for the $711,335 account receivable that EBC had purchased from Geo-Con. SSI refused, and after a failed attempt at mediation, on April 20, 2005, EBC filed a Demand for Arbitration with the American Arbitration Association ("AAA"), seeking an award for the remaining balance due under the Subcontract. On August 23 and 24, 2005, Franklin Kral, the AAA arbitrator, conducted a two day hearing and, on November 21, 2005, he issued ...


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