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Greenstar IH Rep, LLC v. Tutor Perini Corp.

Court of Chancery of Delaware

December 4, 2019

GREENSTAR IH REP, LLC and GARY SEGAL, Plaintiffs,
v.
TUTOR PERINI CORPORATION, Defendant. TUTOR PERINI CORPORATION, Counterclaimant,
v.
GARY SEGAL, Counterclaim-Defendant.

          Submitted: September 10, 2019

          Kenneth J. Nachbar, Esquire and Lauren Neal Bennett, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware and Ira Lee Sorkin, Esquire, Amit Sondhi, Esquire, Kevin M. Brown, Esquire and Michael Meyers, Esquire of Mintz & Gold LLP, New York, New York, Attorneys for Plaintiffs Greenstar IH Rep, LLC and Gary Segal and Counterclaim Defendant Gary Segal.

          Brian C. Ralston, Esquire and Aaron R. Sims, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware and Robert Nida, Esquire and Matthew J. Luce, Esquire of Nida & Romyn, P.C., Beverly Hills, California, Attorneys for Defendant/Counterclaimant Tutor Perini Corporation.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor.

         On July 1, 2011, two construction companies, Tutor Perini Corporation and Greenstar Services Corporation, among others, signed an Agreement and Plan of Merger (the "Merger Agreement") whereby Greenstar became a wholly-owned subsidiary of Tutor Perini. During negotiations, Tutor Perini questioned whether Greenstar had overestimated the amount of cash it would eventually collect from its customers. To address this concern, the parties agreed to several so-called "holdback provisions" tied to Greenstar's post-closing cash collections. These provisions called for the sellers to receive additional consideration if Greenstar achieved certain cash collection milestones post-closing.

         As they are wont to do, the contingent consideration provisions prompted post-closing disagreements. The sellers claimed Greenstar had collected enough to mandate release of the holdbacks; Tutor Perini disagreed and refused to release the holdback funds. After much back and forth, the parties agreed to resolve their dispute by modifying the Merger Agreement's holdback provisions, as memorialized in a May 3, 2013, Holdback Settlement and Release Agreement (the "Holdback Agreement").

         While intended to provide clarity, the Holdback Agreement did no such thing. The parties were soon back at square one-disputing whether the sellers were owed holdback funds, this time under the Holdback Agreement. That dispute led to this litigation. According to the sellers, they are owed $8 million in holdback payments. Tutor Perini maintains the sellers are owed nothing. The Court convened a trial and this is the Court's post-trial decision.

         At the threshold, the parties do not agree how the Holdback Agreement is meant to work. They have offered competing constructions of key terms. While certain of the contract's provisions are not models of clarity, the parties took the extra step of providing an explanation of how they intended the contract to operate given a hypothetical set of collections by Greenstar in its post-closing operations. This explanation was incorporated into the Holdback Agreement and provides useful insight into the parties' intent.

         Delaware law requires that our courts read all elements of an integrated contract together when undertaking to construe the contract as a matter of law. With this canon in mind, I am satisfied that Greenstar has achieved the collection milestones that trigger the holdback payments, all as provided by the Holdback Agreement with its incorporated examples. Judgment will be entered for the sellers in the amount of $8 million.

         I. BACKGROUND

         The Court held a three-day trial during which it heard live testimony from 7 witnesses and received over 451 trial exhibits along with the lodged deposition testimony of 14 witness.[1] I have drawn the facts from the stipulations of fact entered before trial, the testimony and exhibits presented during trial and from reasonable inferences that flow from that evidence.[2] The following facts were proven by a preponderance of the evidence.

         A. Parties and Relevant Non-Parties

         Plaintiff, Greenstar IH Rep, LLC ("IH Rep"), is a Delaware Limited Liability Company.[3] The Merger Agreement names IH Rep as the "Interest Holder Representative"-meaning it holds the sellers' post-closing rights and, if owed, will receive the holdback payments on their behalf.[4]

         Plaintiff, Gary Segal, is the former CEO of both Greenstar and Five Star Electric Corporation.[5] Segal's father formed Five Star in 1959, and Segal joined the firm in 1981.[6] Upon his father's death in 1991, Segal became Five Star's president and sole owner.[7] After assuming leadership, Segal went on to shepherd Five Star into a period of sustained growth.[8] Segal is one of the identified "stockholders" (or sellers) in the Merger Agreement.[9]

         Non-party, Greenstar, wholly-owns the stock of Five Star and WDF, Inc.[10]Five Star is an electrical contractor and WDF is a mechanical and plumbing contractor.[11] Non-party, Larry Roman, is WDF's CEO.[12] He is also one of the identified sellers in the Merger Agreement.

         Around 2008, Roman and Segal noticed their respective companies (WDF and Five Star) were subcontractors on many of the same jobs with Five Star handling the electrical work and WDF handling the plumbing.[13] Accordingly, they decided to combine their two firms to form Greenstar, a "turnkey" solution offering mechanical, electrical, plumbing and sprinkler contracting services "all in one."[14]

         Defendant, Tutor Perini, is a publicly traded Massachusetts corporation with its principal place of business in Sylmar, California.[15] Non-party, Ronald Tutor, is the Chairman and CEO of Tutor Perini.[16]

         B. Tutor Perini Acquires Greenstar

         In 2011, Greenstar and Tutor Perini began negotiations for Tutor Perini to acquire Greenstar, along with its subsidiaries-Five Star and WDF.[17] Greenstar was attractive to Tutor Perini because it furthered its strategy to integrate its business vertically by acquiring specialty contractors, particularly in the New York market.[18]

         Following negotiations between the parties, Tutor Perini, Greenstar, a merger subsidiary and IH Rep executed the Merger Agreement.[19] Greenstar became a wholly-owned subsidiary of Tutor Perini, and the sellers, as identified in the Merger Agreement (the "Sellers"), collectively received $208 million.[20] The Merger Agreement computed the purchase price by adding Greenstar's "book value" of $175 million to a "kicker" of $33.5 million.[21] Per the Merger Agreement, the deal consideration was divided into a cash payment at closing, an earn-out and multiple escrow holdbacks.[22]

         At closing, Greenstar's $175 million book value included an asset representing its estimated future cash collections (or "CIE," as further defined below).[23] Because Tutor Perini valued Greenstar based on its book value, Tutor Perini required Greenstar to disclose its CIE on schedules and to represent that the CIE would eventually be collected from its customers.[24]

         Throughout the parties' negotiations, Tutor Perini expressed concerns about whether much of Greenstar's CIE was actually collectible.[25] These concerns led Tutor Perini to insist on two escrow holdbacks in the Merger Agreement, a $17.5 million Indemnity Holdback and an $8 million Special Holdback.[26] The parties structured the holdbacks to incentivize cash collections and ensure that Tutor Perini received the benefit of the assets it "paid for" in the Merger Agreement.[27]This incentive structure made particular sense to the parties since Segal and Roman were to continue as Five Star and WDF's CEOs, respectively, after the merger.[28]As beneficiaries of the holdback payments, they were both incentivized to pursue cash collections with vigor.

         Under the holdback structure, if Greenstar's subsidiaries failed to reach the CIE targets listed on Greenstar's closing schedules, then Tutor Perini could retain the holdbacks.[29] On the other hand, if Greenstar succeeded in collecting enough cash to hit the targets, then Tutor Perini was obliged immediately to release the holdbacks to the Sellers.[30]

         C. The Parties Reach Impasse on The Release of The Holdbacks

         In April 2013, Segal and Roman believed they had satisfied the conditions for the release of the holdbacks by converting enough of the CIE assets on Greenstar's closing statements into cash.[31] Tutor Perini disagreed for two principal reasons.[32]First, Tutor Perini questioned whether Greenstar's post-closing cash collections came from the receivables listed on the Merger Agreement's schedules, which were the assets Tutor Perini ultimately paid for.[33] Second, Tutor Perini was alarmed that Greenstar was confronting serious cash flow difficulties because its actual cash collections were lagging well behind its booked revenue.[34]

         Ultimately, the dispute over holdbacks led the parties to negotiate the Holdback Agreement.[35] To avoid litigation, Ron Tutor proposed terms for a new agreement that would replace the Merger Agreement's provisions for the $17.5 million Indemnity Holdback and the $8 million Special Holdback.[36] In an April 5, 2013 letter, Ron Tutor outlined his proposal, stating that if the Sellers agreed to certain concessions, then Tutor Perini was "willing to accept more collection risk" and release the $17.5 million Indemnity Holdback.[37] Among other things, the Holdback Agreement would require the Sellers to return some of the $17.5 million if "issues with collectability related to the funds released and/or held . . . result[ed] in a loss to [Tutor Perini's] current balance sheet position."[38]

         D. The Holdback Agreement

         With the assistance of counsel, on May 3, 2013, Tutor Perini, Greenstar and IH Rep entered into the Holdback Agreement.[39] The Sellers agreed to accept a $17.5 million promissory note in exchange for releasing their claims to the $17.5 million Indemnity Holdback under the Merger Agreement.[40] As for the $8 million Special Holdback, the parties agreed to condition the release of that holdback on Greenstar's ability to convert specific CIE assets into cash.[41]To understand the mechanics of this aspect of the Holdback Agreement, it is useful briefly to examine some of the unique aspects of construction accounting that anchor the parties' agreement.

         1. Construction Accounting

         When a contractor bids on a project, it bases its bid price on an estimate of future costs plus a profit margin.[42] If the contractor wins the bid, it must complete the work covered by the contract for the contract price-no matter the actual costs.[43]As a contractor builds the project, it incurs costs. As costs are incurred, the contractor and the owner often disagree over whether those costs relate to the original scope of work the contractor agreed to perform or work that extends beyond what the parties expected or intended. For instance, the owner may ask the contractor to do something different than what was in the original bid (a "change order")[44] or extra work to address a condition that surfaces on the job beyond the contractor's control and increases the contractor's costs (a "claim").[45] Generally Accepted Accounting Principles ("GAAP") allow a contractor to book (i.e., include as revenue) the costs associated with change orders and claims if the contractor believes it will eventually collect them from the owner.[46] Yet the contractor cannot bill for these costs (i.e., convert them into an account receivable) until the contractor and the owner agree that the owner is responsible for them.[47] Moreover, while the total amount of the claim asserted against the owner may include some profit margin, GAAP only allows a contractor to book revenue up to its actual costs.[48]

         When a contractor recognizes unapproved or "pending" change orders or claims, and books them as revenue before they have been billed, the contractor incurs costs in excess of billings (or "CIE").[49] Like an account receivable, a contractor records CIE on its balance sheet as an asset.[50] But the value of the CIE asset does not necessarily equate to the full amount of the underlying change orders and claims.[51] Instead, "[t]he philosophy is that [a contractor] would make an estimation of what [it] expects to recover in accordance with GAAP."[52] In this regard, GAAP requires the contractor to reduce the value of CIE in anticipation that its collection may involve legal costs and disagreements with the owner (i.e., the "risk of collectability").[53]

         2. Structure of the Holdback Agreement

         With this background in mind, the Holdback Agreement provides two separate lists (appended to the agreement as Exhibits B and C), each containing change orders and claims from Greenstar's projects.[54] Before Tutor Perini is obliged to release the $8 million Special Holdback, the Sellers are obliged to demonstrate that a specified portion of those change orders and claims will be converted into cash.[55]

         The Holdback Agreement's Exhibit B provides a list of "Pending Claims."[56] The total dollar value of the Pending Claims is $60.529 million (the "Cash Collection Required" or the "Bogey").[57] If Greenstar fails to collect the full amount of the Bogey, then any shortfall creates a "Pending Claims Uncollected Amount[]" (or "Shortfall").[58] If a Shortfall occurs, then Tutor Perini may "offset" that Shortfall against the $8 million Special Holdback.[59] "In other words, if the [Shortfall] is equal to or greater than $8 million, Tutor Perini owes Plaintiffs $0."[60] Specifically, Section 2 of the Holdback Agreement provides:

Pending Claims. . . . [T]he pending claims set forth on Exhibit B hereto (the "Pending Claims") are the remaining outstanding claims that could have been made under . . . the Merger Agreement. [I]f the amounts set forth under the "Cash Collection Required" [(i.e., the Bogey)] with respect to the Pending Claims are not collected in full by [Greenstar] . . . prior to July 31, 2014 (or which [Tutor Perini] believes in good faith will not eventually be collected in full in accordance with [Greenstar's] customary business practices) (the "Pending Claims Uncollected Amounts"), [Tutor Perini] shall be entitled to offset such Pending Claim Uncollected Amounts solely against the [Holdback Amount (i.e., $8 million)].[61]

         The Cash Collection Required are set forth on the following schedule:[62]

         (Image Omitted)

         In their effort to reach the Bogey, the Sellers are not limited to collection of the Pending Claims listed on Exhibit B. Rather, the Sellers can "credit[]" certain "Offset Claims" against the Shortfall.[63] The Offset Claims are those claims listed on Exhibit C that "result[] in additional net profit."[64] The Holdback Agreement describes the Offset Claims and their relationship to the Shortfall in a separate provision of Section 2:

[A]ny "Offset Claims" that may be credited against the Pending Claims Uncollected Amounts shall only apply to the projects and claim amounts with respect to such projects set forth on Exhibit C hereto (and only to the extent that such "Offset Claim" results in additional net profit recognized by [Greenstar] after March 31, 2013 (or which [Tutor Perini] believes in good faith will result in additional net profit recognized in accordance with [Greenstar's] customary business practices[.])).[65]

         While the Sellers can apply collections on Exhibit C claims to reach the Bogey, any counterclaim (i.e., a claim asserted against Greenstar on one of the Exhibit C projects) that remains outstanding when Tutor Perini calculates the Shortfall increases the Shortfall:

[T]he amount of any Revised Offset Claims to be credited against the Pending Claims Uncollected Amounts shall be reduced to the extent that any counterclaim related to the projects set forth on Exhibit C (the "Counterclaims") remains outstanding on, has been alleged as of, or has otherwise been paid by [Greenstar] prior to, the date of the applicable calculation.[66]

         In other words, counterclaims against Greenstar from projects listed on Exhibit C (below) decrease any credit from Exhibit C collections.[67]

         Remainder of Page Intentionally Left Blank

         The Holdback Agreement also addresses how to assess the "prospective collectability" of claims.[68]

The U.S. GAAP position taken on [Tutor Perini's] financial statements regarding any Pending Claim or Offset Claim may be taken into consideration, but shall not be dispositive, in assessing the prospective collectability of any such Pending Claim or Offset Claim.[69]

         To summarize, for the Sellers to earn the $8 million Special Holdback, Greenstar must collect certain claims listed on Exhibits B and C in amounts sufficient to reach the Bogey (i.e., $60.529 million). For collections from Exhibit C to count, they must "result in additional net profit . . . after March 31, 2013."[70] And any counterclaims against Greenstar on projects listed on Exhibit C effectively increase the Bogey. In making any of these calculations, Tutor Perini's GAAP position "in assessing the prospective collectability of any such Pending Claim or Offset Claim may be taken into consideration, but shall not be dispositive."[71]Section 4 of the Holdback Agreement allows Tutor Perini to "offset" the total Shortfall (after adjustments for Exhibit C Offset Claims and counterclaims) against the $8 million Special Holdback.[72] But, to the extent the total Shortfall is less than the Special Holdback, Tutor Perini must release the difference to the Sellers.[73]

         On Exhibit D (below), titled "Example of Escrow Holdback Calculation," the parties agreed to two examples that illustrate how the Holdback Agreement is intended to work:[74]

         Remainder of Page Intentionally Left Blank

         As depicted in Exhibit D, the Sellers are able to rely on "any combination of cash receipts from Exhibits B & C" to reach the Bogey.[75] Example I assumes that Greenstar collects (i) $45, 529, 000 on "Pending claims / unbilled costs receipts from Exhibit B," and (ii) $5, 000, 000 on "Offset claim receipts from Exhibit C."[76] The total collection, therefore, is $50, 529, 000. At this number, the Sellers would be $10, 000, 000 short of the Bogey and Tutor Perini could withhold the entire $8, 000, 000 Special Holdback.[77] Example II is similar, but the Sellers are only $5, 000, 000 short. In this circumstance, Tutor Perini would keep $5, 000, 000 of the Special Holdback and pay the Sellers $3, 000, 000.[78]

         E. The Parties Reach an Impasse on Release of the Special Holdback Under the Holdback Agreement

         By the fall of 2014, the Sellers believed they had reached the Bogey and demanded that Tutor Perini release the $8 million Special Holdback.[79] Again, Tutor Perini disagreed.[80] One of the first points of contention was the source of Greenstar's cash collections.[81] From Tutor Perini's perspective, it was unclear whether the Sellers' Bogey calculation used the specific claims on Exhibits B and C or unrelated cash flows.[82] The parties also disagreed over the collection standard for Exhibit C claims. Specifically, they disputed what it meant for an Exhibit C claim to generate additional "net profit."[83] Finally, the parties could not agree on what counterclaims remained outstanding as possible offsets on Exhibit C projects.[84]

         In a series of letters from April 17 through May 5, 2015, the breadth and intensity of the parties' disagreements were fully exposed.[85] On May 8, however, negotiations took a promising turn when Ron Tutor stated that he "believ[ed] equity support[ed] the payment of $6M out of [the] $8M escrow account on the [belief] that many of the claims, although uncollected, will be collected."[86] Unfortunately, the promise of a negotiated resolution was fleeting. Ron Tutor apparently had a change of heart and Tutor Perini returned to its position that Greenstar's cash collections did not support payment of any of the Special Holdback.[87] Later in 2015, Tutor Perini fired Segal as CEO of Five Star.[88] This litigation followed.

         F. Procedural Posture

         On November 7, 2016, Plaintiffs, Greenstar IH Rep and Segal, filed the Verified Complaint.[89] The Complaint alleged (1) breach of contract concerning Tutor Perini's failure to make earn-out payments under the Merger Agreement (Counts I, II and III);[90] (2) breach of contract and promissory estoppel concerning Tutor Perini's failure to release the $8 million Special Holdback as required under the Holdback Agreement and as promised by Ron Tutor (Counts IV and V);[91] and (3) declaratory relief seeking to enjoin a previously-initiated California arbitration by Tutor Perini against Segal in favor of the forum selection provision in the parties' Merger Agreement (Counts VI, VII and VIII).[92]

         On December 22, 2016, Plaintiffs moved for judgment on the pleadings on Counts VI, VII and VIII and asked the Court to require Tutor Perini to withdraw its California arbitration in favor of litigation in Delaware.[93] By Memorandum Opinion dated February 23, 2017, this Court held that whether the claims asserted by Tutor Perini against Segal in the arbitration were arbitrable was a question that must be answered by the arbitrator (Count VI).[94] Plaintiffs' declaratory relief claims (Counts VII and VIII) were dismissed by Order dated June 5, 2017.[95]

         On March 9, 2017, Tutor Perini filed an Answer to the Complaint and asserted counterclaims for fraud and offset against Segal.[96] By Memorandum Opinion dated October 31, 2017, this Court held that IH Rep was entitled to certain earn-out payments under the Merger Agreement and dismissed Tutor Perini's fraud and offset counterclaims.[97] On November 30, 2017, Tutor Perini filed a Notice of Appeal of this Court's Final Order and Judgment.[98] The Supreme Court affirmed by Order dated May 11, 2018.[99]

         This left only Plaintiffs' claims for breach of contract and promissory estoppel related to release of the $8 million Special Holdback (i.e., Counts IV and V).[100] The Court held a three-day trial on these claims on April 18, 2019.[101] After trial, Plaintiffs filed a motion to strike one of Tutor Perini's trial demonstratives and related trial testimony.[102] Following post-trial briefing, the parties submitted this matter for decision after post-trial oral argument on September 10, 2019.[103]

         II. ANALYSIS

         The Sellers allege Tutor Perini breached the Holdback Agreement by refusing to release the $8 million Special Holdback to IH Rep.[104] Specifically, they say Greenstar has collected more than $60.529 million on the pending change orders and claims listed on Exhibits B and C, thus mandating release of the Special Holdback under Sections 2 and 4 of the Holdback Agreement. The Sellers alternatively contend they are entitled to at least $6 million of the Special Holdback under a promissory estoppel theory.[105] For this claim, the Sellers point to Ron Tutor's May 8, 2015 email, stating that he "believ[ed] equity support[ed] the payment of $6M out of [the] $8M escrow account," as the promise upon which they detrimentally relied.[106]

         Tutor Perini counters that Greenstar has not collected enough cash to trigger release of the Special Holdback. Generally, Tutor Perini argues the Sellers' alleged collections do not meet the requirements set out in Section 2 of the Holdback Agreement. In response to the Sellers' promissory estoppel claim, Tutor Perini contends, among other things, that Ron Tutor's May 8 email did not constitute a promise.[107]

         I begin and end my analysis with the Sellers' breach of contract claim. To prevail on a breach of contract claim, a plaintiff must prove by a preponderance of the evidence (1) the existence of a contract; (2) the breach of an obligation imposed by the contract; and (3) damages suffered because of the breach.[108]

         Tutor Perini stipulates that the Holdback Agreement is a binding contract.[109]It also concedes it has not paid the $8 million Special Holdback.[110] Accordingly, to succeed, the Sellers must prove-by a preponderance of the evidence-that Tutor Perini breached an obligation to pay the Sellers at least a portion of the Special Holdback. For reasons explained below, I conclude the Sellers have carried that burden under the clear and unambiguous terms of the Holdback Agreement.

         A. Construction of the Holdback Agreement

         "The primary goal of contract interpretation is to 'attempt to fulfill, to the extent possible, the reasonable shared expectations of the parties at the time they contracted.'"[111] In the search for the parties' shared expectations, the court's first and often last stop is the contract itself.[112] "If, on its face, the 'contract is unambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract or to create ambiguity.'"[113]

         As is often the case in contract disputes, the parties agree the Holdback Agreement is unambiguous. And yet, as is almost always the case in contract disputes, the parties disagree over what the Holdback Agreement means. Of course, the parties' disagreement over an agreement's proper construction, alone, does not render it ambiguous.[114] Rather, "a contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings."[115] On the other hand, a contract is unambiguous when the agreement's "ordinary meaning leaves no room for uncertainty, "[116] and "the plain, common, and ordinary meaning of the words . . . lends itself to only one reasonable interpretation."[117]

         The question, then, is whether the Holdback Agreement has only one reasonable interpretation "when read in full and situated in the commercial context between the parties."[118] In this regard, when assessing "commercial context," the court may consider the parties' "view of the overall transaction" and associated "description[s] of the transaction" without running afoul of the parol evidence rule.[119]

         I begin the contract construction exercise by noting where the parties agree. First, the parties agree on the basic approach for determining whether the Special Holdback has been earned: the Sellers get credit for collections on Exhibit B claims plus collections on Exhibit C claims minus counterclaims listed on Exhibit C that are outstanding as of the calculation date.[120] Second, they agree on the standard for Exhibit B collections. Specifically, to count as collectable, Greenstar must realize either an actual cash collection or "a legal entitlement to collect amounts, which standard is satisfied only through an executed change order or a legally enforceable settlement or judgment."[121] Third, the parties agree that only collections specifically related to the claims listed on Exhibits B and C should count toward the Bogey; revenue unrelated to the claims and change orders on the agreement's exhibits will not count.[122]

         The parties' principal dispute is over which of the Exhibit C collections to count toward the Bogey. The disagreement concerns language in Section 2, where the parties agreed, "'Offset Claims' . . . may be credited against [the Shortfall] . . . with respect to such projects set forth on Exhibit C . . . to the extent that such 'Offset Claim' results in additional net profit."[123] The parties agree Exhibit C Offset Claims only count to the extent they "result[] in additional net profit."[124] But they do not agree on what the phrase "additional net profit" means in the context of this provision.

         The Sellers argue any collection from Exhibit C should count toward the Bogey except in rare situations when a collection from an Exhibit B claim overlapped with an Exhibit C collection.[125] This interpretation-like the general structure of the Holdback Agreement-focuses on cash collections.[126] In this regard, the Sellers emphasize that the collection standard for Exhibits B and C is the same (i.e., cash in the door or a legal entitlement to cash).[127]

         The Sellers' construction lines up well with the calculation examples provided on Exhibit D. Indeed, that exhibit directly supports the premise that any Exhibit B and C cash collections should be added together when determining whether the Bogey has been hit: "Total cash collection requirement per Exhibit B (can be made up of any combination of cash receipts from Exhibits B and C)."[128]

         The comments on Exhibits B and C (below) also support the Sellers' position that collections on Exhibit B and C claims, added together, will be credited against the Bogey without condition.[129]

Job

Exhibit B Claims / Unbilled @ 3/31/13

Exhibit C Claim Amount

Exhibit B Comment

Exhibit C Comment

Freedom Tower[130]

$5

$29.436

Collection of $5M included in 2012 revenue for [] general condition claim of $29.4M (See Exhibit C).

Claim amount settled less $5M previously recognized will be offset amount (see Exhibit B).

Jamaica 2E [131]

$5.8

$23.086

Collection of $5M included in 2012 revenue for [] general condition claim of $23.1M (See Exhibit C).

Claim amount settled less $5M previously recognized will be offset amount (see Exhibit B).

Jamaica 2G

$15.541

$7.3

Collection of amount related to request for [] delay as of 3/31/13.

         The Sellers contend that these three claims on Exhibit C included amounts that had already been booked when the Holdback Agreement was executed.[132] They say the Exhibit B amount was the portion of the claim that Greenstar had booked, and the Exhibit C amount was the total amount Greenstar could identify-but which may not have been booked as CIE.[133] They note that Exhibit C's two comments explicitly state that the "Claim amount settled [(i.e., collected)] less [the amount] previously recognized will be [the] offset amount."[134] In other words, the Sellers may credit all Exhibit B and C collections-allocated first to Exhibit B with any overflow going to Exhibit C in the event of overlap.

         According to the Sellers, the purpose of the "net profit" requirement for Exhibit C is to avoid double counting.[135] The net profit requirement thus recognizes and accounts for the fact that Exhibit C claims sometimes include claims on Exhibit B.[136] In such cases, if Greenstar collects the full amount of the Exhibit C claim, only that portion which "results in additional net profit . . . after the [Holdback Agreement's execution]" (i.e., the unbooked portion) will count as an Exhibit C Offset Claim.[137] The remainder is credited under Exhibit B. Thus, according to the comments in the exhibits, when there is overlap between Exhibits B and C, the Exhibit C "claim amount settled less [] previously recognized will be [the] offset amount."[138]

         The Sellers' proffered interpretation aligns with the ordinary meaning of "net profit."[139] Here again, it is important to focus on the commercial context of the contract.[140] The Holdback Agreement itself requires "the Pending Claims [to be] collected in full."[141] There is no mention of Greenstar's broader operational profitability. The genesis of the cash collection requirement is what Ron Tutor described as Tutor Perini's "collection risk" and the concomitant need for the acquired businesses to collect what Tutor Perini "paid for."[142] This collection risk is a key component of the Holdback Agreement's commercial context.

         All things equal, the collection of unbooked claims increases net profit because collections increase revenue without increasing costs.[143] Moreover, even if a claim amount were booked (and thereby already increased revenue and profitability), failure to collect a booked amount would cause a write-down and corresponding reduction in profitability.[144] As a result, the only way the collection of an Exhibit C claim would not increase profitability is if it had already been accounted for on Exhibit B-a nuance the Sellers capture specifically in their proposed construction by prohibiting double counting.[145]

         After carefully considering the Sellers' proffered construction of the disputed provisions of the Holdback Agreement, I am satisfied it is reasonable and well supported by the express terms of the contract and its incorporated examples, particularly "when read in full and situated in the commercial context between the parties."[146] To answer the ambiguity question, however, I must determine whether the Sellers' construction is the only reasonable construction or whether Tutor Perini has proffered a reasonable construction as well.

         For its part, Tutor Perini reads the net profit requirement to mean that collections on Exhibit C claims only count toward the Bogey if the projects themselves generate net profit.[147] Specifically, according to Tutor Perini, "[w]hether an Exhibit C Offset Claim has generated 'additional net profit' is determined by calculating the P&L impact that the resolution of the claim has on the project."[148]Under this construction of Section 2, there is no single formula for determining net profit. Rather, "[t]he specific method by which this calculation is performed depends on various factors unique to each job."[149] To account for the fact that its net profit definition cannot be applied consistently across all projects, Tutor Perini claims the Holdback Agreement grants it significant discretion as the "arbiter of net profits" to decide when a job has yielded "additional net profit" such that collections on Exhibit C claims may be counted toward the Bogey.[150]

         Even a cursory glance reveals that Tutor Perini's proffered construction adds limitations to Exhibit C collections that appear nowhere in the Holdback Agreement.[151] The parties took pains to set out the mechanics for calculating the Shortfall but, tellingly, Tutor Perini's net profit formulation is missing.[152]The omission of Tutor Perini's case-by-case approach from the Holdback Agreement is stark and likely reveals the parties' appreciation that any such approach would drag out the determination of the Special Holdback indefinitely as the parties await completion of long-term construction projects to assess net profitability. As discussed below, this strung out process not only would conflict with the contract's overall scheme for incentivizing collections, it would render the specific examples the parties agreed to in Exhibit D (that contemplate a more predictable approach to determining net profit) meaningless.

         First, the Holdback Agreement describes the accounting standards that would govern the "prospective collectability of any [] Pending Claim or Offset Claim."[153]In this regard, Tutor Perini's "US GAAP position taken on [Tutor Perini's] financial statements . . . may be taken into consideration" but it is not "dispositive."[154] This language makes clear that (1) collectability is the focus, and (2) Tutor Perini's determinations of net profit per job are not controlling. The parties gave no indication in the Holdback Agreement that Tutor Perini had been granted unchecked discretion as an "arbiter" of net profit.[155] And there is no basis to inject that authority into the agreement after the fact.

         Second, Exhibit D provides two calculation examples-neither of which even mention the word "profit" or "profitability." To the contrary, Exhibit D states the "[t]otal cash collection requirement . . . can be made up of any combination of cash receipts from Exhibits B & C," and "cash collected" should be added to "offset claim receipts."[156] Again, the focus is on cash collections. Nothing in these examples suggests that collections are subject to Tutor Perini's discretionary determination of whether the collections increased net profit on a job-by-job basis.[157]

         Third, Tutor Perini's construction ignores the commercial context in which the parties agreed to modify the prerequisites to earning the Special Holdback.[158]Ron Tutor, himself, explained that the Holdback Agreement was meant to address Tutor Perini's "collection risk"[159] and to "motivate [Segal] to collect our [] cash."[160]Stated simply, Tutor Perini wanted to realize Greenstar's balance sheet net worth in full by collecting amounts Greenstar claimed it was owed.[161] Tutor Perini's litigation construct of needing to realize net profit on as yet completed jobs as a predicate to paying the Special Holdback not only finds no support in the contract, it does not comport with the commercial context the parties were addressing when they entered into the Holdback Agreement. In other words, Tutor Perini's proffered construction is not reasonable.

         ******

         Having concluded the Sellers have offered the only reasonable construction of the Holdback Agreement, I am satisfied the contract is not ambiguous and that the Sellers' construction must prevail. Cash collections associated with claims listed on Exhibit C meet the Exhibit C collection standard as long as such receipts are not double-counted with actual receipts from Exhibit B.

         B. Tutor Perini Must Release All of the $8 Million Special Holdback

         Deciding the proper construction of "net profit" does not end the parties' dispute. Even when applying the Sellers' construction of net profit, Tutor Perini argues the Sellers still have not proven their entitlement to the $8 million Special Holdback. Resolving this dispute requires a careful review of Greenstar's projects, as listed on Exhibits B and C, to determine whether the Sellers have proven, by a preponderance of the evidence, that Greenstar collected at least $52.529 million (net of outstanding counterclaims) in order for the Sellers to recover at least some of the Special Holdback.[162]

         The parties dispute approximately $34 million of collections across four named projects: 156 Stations ($10.5 million), [163] Freedom Tower ($5 million), [164]Jamaica 2G ($16.582 million)[165] and John Jay ($1.538 million).[166] The parties also dispute the total amount of counterclaims pending against Greenstar on Exhibit C claims. For reasons stated in detail below, the preponderance of the evidence proves that Sellers are entitled to all of the $8 million Special Holdback.

         1. $45 Million of Undisputed Collections

         Before addressing the disputed collections, I recount the collections upon which the parties agree. Tutor Perini gives the Sellers credit for the following receipts (assuming the Sellers' construction of "net profit" is correct):[167]

Project

Undisputed Credit[168]

Freedom Tower

$12 million[169]

9/11 Memorial

$15.068 million[170]

Bowery Bay

$1.215 million[171]

Scada 24

$1.25 million[172]

Scada 27

$1.5 million[173]

Heschel

$.388 million[174]

Community Health

$.107 million[175]

Eagle Metro

$.111 million[176]

Campus

$.057 million[177]

PS 95X

$.155 million[178]

Young Womans

$.020 million[179]

Ward Island Interim (78H)

$2.99 million[180]

Ward Island BNR (87G)

$.241 million[181]

John Jay

$1.562 million[182]

Five Stations / Three Stations

$1.75 million[183]

Bronx Zoo

$.5 million[184]

150 Amsterdam

$1.35 million[185]

Tallman Island (P) and (H)

$3.8 million[186]

Fulton Street

$.983 million[187]

SUM

$45.047 million

         In sum, Tutor Perini concedes the Sellers may credit at least $45.047 million toward the Bogey.

         Remainder of Page Intentionally Left Blank

         2. The Sellers May Credit $10.5 Million From 156 Stations

         The 156 Stations project has claim amounts listed on both Exhibits B and C.[188]

Project

Exhibit B Claims / Unbilled @ 3/31/13

Exhibit C Claim Amount

156 Stations

$ 1 million[189]

$ 11.884 million

         The parties agree Greenstar has collected $10.5 million of the $11.884 million value listed on Exhibit C, [190] while the $1 million amount listed on Exhibit B remains outstanding.[191] Despite this common ground, Tutor Perini disputes whether the Exhibit C collection meets the "net profit" requirement under the Sellers' definition.[192] Specifically, Tutor Perini argues the Sellers should not get credit for the $10.5 million because the full amount of the Exhibit C claim was allegedly booked as revenue when the parties executed the Holdback Agreement.[193] Therefore, according to Tutor Perini, even under the Sellers' definition of "net profit," the $10.5 million collection could not meet the Exhibit C collection standard because it had already increased revenue when it was booked.[194] The Sellers respond by exposing that Tutor Perini's reading renders the $11.8 million claim on Exhibit C superfluous. As the Sellers correctly observe, by Tutor Perini's lights, even if Greenstar had collected the full $11.884 million listed on Exhibit C, the Sellers could never get credit for that claim.[195]

         As the Sellers point out, there would be no reason to include a value on Exhibit C if it was uncollectable for purposes of reaching the Bogey under any set of facts.[196] To reiterate, the purpose of the "net profit" requirement for Exhibit C is to avoid double counting when an Exhibit C claim is inclusive of an Exhibit B claim.[197] There is no double counting problem with the 156 Stations claim listed on Exhibit B. The $1 million listed for 156 stations was a "reserve for possible legal costs to finalize settlement and payment."[198] The Exhibit C claim did not include the $1 million legal fees listed on Exhibit B.[199] Because there is no double counting issue, the Sellers may credit the $10.5 million they actually collected from Exhibit C toward the Bogey.

         3. The Sellers May Credit $5 Million from Freedom Tower

         Tutor Perini disputes whether a "$5 million change order [collected by Greenstar and applied toward the Bogey by the Sellers] . . . relat[ed] to the claim listed on Exhibit B and C."[200] In other words, the parties do not dispute that money came in the door in collection of this claim. The dispute lies in whether this money relates to an Exhibit B claim or to unrelated work on the Freedom Tower project.

         Tutor Perini cites Ryan Soroka's trial testimony for the proposition that the $5 million receipt was unrelated to Exhibit B.[201] Specifically, Soroka testified that he "recall[ed]" that "$5 million of [] claims for Freedom Tower were paid in 2015" and that "[w]e've given credit in full" for that amount.[202] Yet credible testimony from Messrs. Tutor, Segal, Therien and Soroka reveals that Greenstar did collect the $5 million on Exhibit B.[203] With this testimony, the Sellers have proven by a preponderance of the evidence that they may credit the full $5 million toward the Bogey.

         4. The Sellers May Credit $13.541 Million on Jamaica 2G

         Tutor Perini claims the Sellers are entitled to no credit for Jamaica 2G while the Sellers argue they are entitled to credit $16.682 million.[204] Tutor Perini's litigation position contradicts its pre-litigation position, per Ron Tutor's March 2015 letter, that the Sellers could credit at least $13.541 million of $18.7 million in total collections on the Jamaica 2G project.[205] At trial, Tutor Perini attempted to walk back its previous calculation by claiming the 2015 letter represented a "best case scenario for [the Sellers]" and that the letter was unreliable on its own terms.[206] The walk back is not credible. Tutor Perini's contemporaneous memoranda-prepared in the midst of the parties' pre-litigation discussions-characterizes the $13.541 million as a "[c]ollection on [p]reviously [o]utstanding UCO's/unbilled."[207] This ...


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