The special master who recently chopped tens of millions of dollars from massive litigation claims between the DeKalb County School District and its former construction management firm will consider a bid Tuesday to put an end to the seven-year legal odyssey.
The former federal appeals court judge appointed to wade through pre-trial matters will hear arguments by the construction management firm, Heery International Inc., that the school district doesn’t have standing to pursue its remaining $32 million to $58 million in claims.
Heery knows about standing issues. The special master, Stanley F. Birch Jr., last month found that the company had no standing to bring a suit against the school district in the first place.
Heery’s problem, Birch said, was that its business with the school district was part of a joint venture with E.R. Mitchell & Co. Last year, Mitchell settled with the school district and started cooperating in the litigation against Heery. Without Mitchell, Heery has no standing, Birch said in a May 10 decision.
Birch’s ax has also fallen on the school district. In response to Heery’s initial suit for unpaid invoices and other claims totaling almost $500,000, the DeKalb district claimed that Heery owed it more than $100 million for fraud due to alleged overbilling, breach of fiduciary duty and racketeering.
On May 28, Birch eliminated DeKalb’s claim that Heery failed to save the district money by purchasing construction supplies in bulk, said the district’s lawyer, King & Spalding partner Robert C. Khayat Jr.
That claim was worth $45 million to $81 million, according to a report by the school district’s damages expert.
Birch’s decisions leave the school district able to seek between $32 million and $58 million, said Khayat. Punitive damages and tripling of some damages under RICO could push those figures higher, he said.
The motion Heery will argue on Tuesday says the school district was never a party to the construction contracts. The DeKalb County School Board was the contracting party, Heery said, claiming that the school board and school district are "separate entities."
Heery’s brief, by Mark Grantham of DLA Piper, asks the judge to consider that the cover pages of the two construction contracts state that the agreements are between the school board and Heery, as does the first page of the agreements.
Heery also argues that because the checks to Heery were written by the school board, not the school district, it’s the board that is the proper party in the case.
"Georgia’s black letter law dictates that the Board is the real party in interest because it—not the [school district]—was a party," to the agreements, the brief says.
The school district has responded that its standing is proper, citing a Georgia statute saying "each county … shall compose one school district and shall be confined to the control and management of a board of education."
Also in a second motion challenging standing, Heery argues if it no longer has standing to bring suit as a result of Birch’s May 10 decision, then it cannot be sued by the school district.
"To hold otherwise would result in an untenable scenario wherein Heery lacks standing to pursue any affirmative claims … yet at the same time bear 100 percent of the liability," the motion says.
The school district responded that standing to sue and be sued are not the same.
"Georgia law draws a critical distinction between standing to sue and the liability as a defendant, and one is not dependent on the other," the school’s response says. "While all joint ventures are indispensable parties to an action brought by the joint venture, a suit may be brought against any member of the joint venture."
The case has already cost DeKalb taxpayers at least $18 million in payments to King & Spalding. But earlier this month, the firm and the school board formed a new contract by which the firm will now pay the expenses of the litigation and be reimbursed only on whatever the district recovers.
The formula in the contract says that if any damages are paid to the district, the firm is first in line to cover its fees and expenses. After that, the school district would collect the next $6 million, with K&S collecting the next $5 million. If the recovery goes higher, K&S will receive the next $5 million, with the district and the firm alternating collecting $2.5 million through the next $15 million.
If another $50 million is collected, K&S will get the first $5 million and the parties will again alternate taking that amount until the damages are exhausted.
A key change from the previous contract is that the school district has "unfettered discretion" to settle the litigation without first paying K&S about $30 million in accumulated legal fees.
Representatives for Heery said they are appealing Birch’s decision on standing. They will be heard Aug. 14 by DeKalb Superior Court Judge Clarence F. Seeliger, who appointed Birch and is presiding in the case. The school district will not say whether it is appealing Birch’s decision to strike the bulk purchasing claim until the order is in writing.
The civil case has proceeded along with a criminal investigation into DeKalb school officials who have been indicted on charges that they steered construction contracts to friends. Heery has claimed that then-school Superintendent Crawford Lewis and the district were engaged in "pay to play" schemes.
However, on Heery’s claim that the school district acted in bad faith when it fired Heery, Birch said there was no evidence that the school district or Lewis did this.
"There is no evidence that the school district suspended or terminated the agreement in bad faith," Birch wrote. "The court also finds that Heery has failed to present evidence of any alleged bad faith conduct on the part of Dr. Lewis."
Lewis’ lawyer, Michael L. Brown, said the order is not admissible in the criminal case.
Another attorney for Lewis, Judy F. Aust, said the ruling nonetheless has a positive effect for their side.
"If there is no wrongful termination, then there was no conspiracy," to oust Heery, as Heery claims in the suit.
"I have felt the whole case is a paper tiger invented to make the case more than it is, a construction dispute," she said.
Seeliger has already upheld Birch’s order rejecting the bad faith claims and Heery has taken that order to the state Court of Appeals.
Heery spokesman David Rubinger said the company, which is represented by DLA Piper, will not comment on issues on appeal.
The case is Heery International Inc. v. DeKalb County School District, Georgia No. 07CV2532.