Tuesday, September 20, 2011

Contractor and Two Developers Accused of Racketeering

In a highly unusual suit, New York unions accuse HRH Construction and two others of using dummy firms to cheat workers out of wages and benefits. Tip of the iceberg?

York City construction unions filed a racketeering suit Tuesday alleging that a trio of two developers and one contractor illegally conspired to cheat workers out of millions of dollars in wages and benefits on several projects in Manhattan and Brooklyn.

In the suit, filed Tuesday morning in federal court in White Plains, N.Y., Metallic Lathers Union Local 46 and the Mason Tenders District Council contend that Long Island-based Lalezarian Developers and Manhattan-based JMH Development colluded with HRH Construction to bilk workers out of $7 million in wages and benefits from 2007 through 2011. HRH Construction, once one of the city's largest contractors, went bankrupt two years ago. The complaint seeks triple damages that would boost the total to $21 million.

The suit alleges that the developers diverted payments that should have been made to HRH Construction—a unionized general contractor—to a non-union dummy corporation created by the developers and HRH Construction to help skirt expensive union contracts. In the projects at the center of the legal action, workers were paid $12 an hour without benefits, instead of the going union rate of about $55 an hour with benefits.

“It's about a union construction firm that, in an effort to avoid its contracts, created a phony alter ego and, put construction management contracts in the name of that alter ego, but continued to do the work themselves,” said Thomas Kennedy, an attorney with Kennedy Jennik and Murray, who brought the suit.

In an article last May, Crain's detailed how the unions inserted themselves into HRH Construction's bankruptcy case in order to gain access to documents and testimony that indicated Leviathan Construction was an alter ego of HRH Construction. Since then, lawyers for the unions have dug through reams of additional company documents and emails and discovered what they believe is evidence sufficient to bring the racketeering suit. Some details of the suit were reported in Tuesday's Daily News.

The complaint quotes one email in which a Lalazerian employee writes to HRH Construction executives and to her boss, Kevin Lalazerian, about payments for projects at 350 W. 37th St. in Manhattan and 235 Gold St. in Brooklyn. “To clarify, you want no payments to HRH Construction for either project right now,” the email said. “You would like the payments made to Leviathan.”

In 2007, HRH Construction, the company that built Citicorp's headquarters and was Donald Trump's contractor of choice, placed No. 7 on Crain's list of top area contractors, with revenue of $455 and profits of $3.7 million.

In 2009, the 86-year-old company earned just $1.2 million and filed for Chapter 11 bankruptcy protection. It hit bottom earlier this year, abandoning its reorganization and moving to a Chapter 7 liquidation.

HRH Construction's demise is a tale of skullduggery and alleged fraud. Its downfall was accelerated by Local 46, which suspected the firm had set up a nonunion alter ego to sidestep its labor contracts, a practice known as double-breasting. The union bought several claims, including one for $1,246.31 owed to a Yonkers exterminator, to gain standing in bankruptcy court, and then set out to prove its case.

HRH Construction paid health insurance premiums and office expenses for Leviathan Construction, and that its principal employees had all worked for HRH Construction. Documents revealed that HRH Construction had guaranteed Leviathan Construction's work. The unions believed HRH Construction had run money through Leviathan Construction to keep it from creditors.

In addition to the charges against Lalezarian Developers, the suit alleges that JMH Development also participated in the alleged racketeering scheme in its project at 184 Kent St. in Brooklyn.

Racketeering suits filed by employers against unions are commonplace, but ones brought by labor groups against companies are highly unusual, legal experts said. Mr. Kennedy called the case “unprecedented” because of the level of detail on the inner workings of the companies the unions were able to dig up through HRH Construction's bankruptcy. “We think that this case is merely the tip of the iceberg,” said Robert Ledwith, business manager of Local 46. “We know this kind of illegal activity is widespread throughout our industry.”

Crain's New York Business