MTA to Settle Suits, Pay $3.5 Million to Contractor It Fired

Eager to avoid the uncertainties of further litigation and the embarrassment of a public trial, the Metropolitan Transportation Authority’s board Thursday agreed to pay $3.5 million to the subway contractor it fired and accused of fraud after a huge sinkhole swallowed a stretch of Hollywood Boulevard.

The sweeping out-of-court settlement of five separate lawsuits resolves not only all of Shea-Kiewit-Kenny’s legal actions against the MTA, but also the transit agency’s countersuits against the contractor. As part of that agreement, the MTA is required to formally rescind its firing of Shea-Kiewit-Kenny and to state that the contractor was terminated for the parties’ convenience.

The MTA already has spent more than $10 million in legal fees pursuing what has become the costliest legal fight in its troubled history.

MTA chief executive Julian Burke said he recommended the payment to the contractor because the cost of continuing the legal battle and the risk posed by Shea-Kiewit-Kenny’s counterclaims against the public agency outweighed any potential benefit.

“Some may argue that MTA should have rolled the dice and taken its chances in court. However, the risks are too great and the only certain winners would be the lawyers,” Burke said.

The settlement also makes it unlikely that the MTA will suffer the embarrassment that would ensue from public scrutiny of the construction work the agency allowed Shea-Kiewit-Kenny to perform while building the outer walls of the twin subway tunnels beneath Vermont Avenue and Hollywood Boulevard.

Despite the problems in the temporary outer walls, which supported the tunnel during construction, top MTA officials and the agency’s experts said the final steel-and-concrete inner tunnel is solid and safe. After years of delays, cost overruns and construction problems, the MTA is planning to open the Hollywood subway to passengers in late May or early June.

Under terms of the settlement, reached by Burke, Shea-Kiewit-Kenny executives and a mediator over the Presidents Day weekend in San Francisco, each side will drop its lawsuits and claims against the other and pay its own legal fees. The MTA, however, will release a $3.5-million payment it withheld after the June 1995 Hollywood Boulevard sinkhole led to the contractor’s firing.

The package also removes the only obstacle to a final settlement of a related whistle-blower case in federal court. In that action, Shea-Kiewit-Kenny has agreed to pay $8.25 million to settle claims by Gary L. Buffington, a safety inspector on the Metro Rail subway project. He alleged that Shea-Kiewit-Kenny defrauded the MTA and violated state and federal law by submitting false claims for payment on tunnel work that did not meet contract specifications.

In settling Buffington’s case, Shea-Kiewit-Kenny denied all those allegations. But if Buffington’s case had gone to trial, a federal court jury and the public would have been given an intimate look at the manner in which Shea-Kiewit-Kenny built the subway beneath Hollywood.

Court records, along with color photographs and a videotape that would have been used in a trial, show that wood debris, cement bags, tunnel trash and substandard wooden wedges often were placed in the expansion gaps of the outer tunnel walls.

The whistle-blower and his lawyer, Louis J. Cohen, said they intended to argue that wooden wedges substituted for steel struts and placed in the expansion gaps were substandard. Instead of installing high-grade cement grout, capable of withstanding 5,000 pounds per square inch of pressure, around the wedges, the contractor used a stucco mortar mix, Buffington alleged.

“It’s strictly a case of not getting what you paid for,” Buffington said in an interview. “They used garbage.”

Shea-Kiewit-Kenny was fired by the MTA in July 1995 after the sinkhole became a symbol of the construction problems that have plagued the subway project. A week before the firing, federal agents and the MTA’s inspector general’s office raided Shea-Kiewit-Kenny’s offices and launched a criminal investigation into the company’s performance, but that case was dropped in 1997 with no explanation.

At the time, the joint venture of three construction giants--the J.F. Shea Co., Kiewit Construction Co., and Kenny Construction Co.--had been paid more than $143 million to build twin subway tunnels underneath Vermont Avenue and Hollywood Boulevard. Ultimately, Shea-Kiewit-Kenny received $155 million.

The company immediately sued for wrongful termination, charging that the MTA had violated the contract’s provisions for resolving such disputes.

Two other contractors--Tutor-Saliba-Perini and Kajima/Ray Wilson--were hired to finish the tunnels, which stretch six miles from Wilshire Boulevard northward under Vermont Avenue before turning west beneath Hollywood Boulevard. The MTA paid those firms another $70 million.

County supervisor and MTA board member Zev Yaroslavsky said he voted for the settlement reluctantly. “It wasn’t a just decision,” Yaroslavsky said. “It’s a good business decision. MTA was spending $3 million a year on legal fees. It’s just as well we get out of this bind and stop buying artwork for the lawyers’ offices.”

In the “global” settlement Thursday, the MTA also agreed to drop its appeal of the whistle-blower case. The MTA will receive about $2 million in the settlement of that case. The state and federal government will also share in the federal court settlement.

Shea-Kiewit-Kenny will pay $1,687,500 to whistle-blower Buffington. His lawyer will receive $2.85 million in fees and court costs. The company did not admit to any wrongdoing.

“Unfortunately, the events during the past three years have only proved the folly of SKK’s termination,” said John F. Shea, the company president, after Thursday’s vote. “As a result of the termination, MTA unnecessarily spent millions of dollars to complete the subway project and additional millions of dollars in legal fees attempting to justify the termination.”

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Tunnel Timeline

June 24, 1992: Subway tunnel contract awarded.

Sept. 9, 1992: Contractor seeks to substitute wooden wedges for steel struts in expansion gaps.

July 27, 1994: Ground sinks on Hollywood Boulevard during tunnel excavation.

December 1994: MTA consultant finds substandard wood wedges in sections of tunnel where sinkage occurred. Inspection finds wood debris, cement bags, wood shavings in expansion gaps.

June 22, 1995: Sinkhole swallows 80 feet of Hollywood Boulevard above tunnel.

July 6, 1995: Federal officials and agents of MTA inspector general raid Shea-Kiewit-Kenny offices as part of a criminal investigation.

July 13, 1995: MTA fires Shea-Kiewit-Kenny. Contractor later sues MTA.

Aug. 7, 1995: Metro Rail safety inspector Gary L. Buffington files whistle-blower lawsuit in federal court.

Dec. 12, 1995: MTA sues Shea-Kiewit-Kenny for damages.

Jan. 28, 1999: Shea-Kiewit-Kenny settles whistle-blower case for $8.25 million.

Feb. 25, 1999: MTA board approves sweeping out-of-court settlement, agreeing to pay $3.5 million to contractor. The action ends the costliest legal battle in the agency’s history.