Amoco D.T. Co. v. Occidental Petroleum Corp..

• Decision Date: 17 May 2011
• Docket Number: No. 14–09–00651–CV.,14–09–00651–CV.
• Parties: AMOCO D.T. COMPANY, Amoco X.T. Company, Amoco Y.T. Company, Swepi LP, Shell Land & Energy Company, Shell Onshore Ventures Inc., Shell K2, Inc., and Shell Everest, Inc., Appellants,v.OCCIDENTAL PETROLEUM CORPORATION, Occidental Permian Manager, LLC, Occidental Permian Ltd., and Oxy USA, Inc., Appellees.
• Court: Texas Court of Appeals

343 S.W.3d 837

AMOCO D.T. COMPANY, Amoco X.T. Company, Amoco Y.T. Company, Swepi LP, Shell Land & Energy Company, Shell Onshore Ventures Inc., Shell K2, Inc., and Shell Everest, Inc., Appellants,

v.OCCIDENTAL PETROLEUM CORPORATION, Occidental Permian Manager, LLC, Occidental Permian Ltd., and Oxy USA, Inc., Appellees.

No. 14–09–00651–CV.

Court of Appeals of Texas, Houston (14th Dist.).

May 17, 2011.

Craig Trively Enoch, Mandy J. Ford, Austin, Thomas T. Hutcheson, Warren W. Harris, Carrin F. Patman, Jeffrey L. Oldham, Caroline C. Pace, Houston, for appellants.Deborah G. Hankinson, Brett David Kutnick, Dallas, Harvey G. Brown, Jr., Houston, John A. (Jad) Davis, Jr., Midland, for appellees.Panel consists of Justices FROST, SEYMORE, and CHRISTOPHER.

OPINION

CHARLES W. SEYMORE, Justice.

Amoco D.T. Company, Amoco X.T. Company, Amoco Y.T. Company (collectively, “Amoco appellants”), SWEPI LP, Shell Land & Energy Company, Shell Onshore Ventures Inc., Shell K2, Inc., and Shell Everest, Inc. (collectively “Shell appellants”) ¹ entered into a purchase-and-sale agreement (“PSA”) with Occidental Petroleum Corporation, Occidental Permian Manager, LLC, Occidental Permian Ltd., and Oxy USA, Inc. (collectively, “Oxy”). Pursuant to the agreement, Oxy made a demand for arbitration to resolve a contract dispute, and the case was submitted to arbitration. In a two-to-one decision, the arbitration panel decided in appellants' favor. Subsequently, Oxy discovered undisclosed information pertaining to an arbitrator's relationships with appellants. Oxy moved to vacate the award based on the arbitrator's evident partiality. Appellants filed suit in district court to enforce the arbitration decision. The trial court determined the evidence established evident partiality and vacated the arbitration award. We affirm.

I. Background

In 1997, the Amoco and Shell appellants created a partnership, Altura Energy Ltd. (“Altura”), and contributed their respective oil and gas holdings in the Permian Basin to Altura.² In 2000, appellants sold Altura to Occidental Petroleum Corporation pursuant to the PSA (“Altura transaction”). In the PSA, the parties agreed to resolve disputes through binding arbitration before a panel of three neutral arbitrators, whereby appellants and Oxy would each select an arbitrator, and the third arbitrator would be chosen by the party-selected arbitrators.

Oxy initiated arbitration in July 2006 after a dispute arose concerning interpretation of an environmental-conditions provision of the PSA. The arbitration panel was comprised of Shannon Ratliff (selected by Oxy), Thomas McDade (selected by appellants), and George Chapman (selected by Ratliff and McDade). As required, the arbitrators made disclosures regarding their connections to the parties and potential conflicts. In March 2007, during the course of the pre-arbitration proceedings, McDade left his law firm, McDade & Fogler, and became “of counsel” with the firm of Beck, Redden, & Secrest, L.L.P. (“Beck Redden”).

Arbitration hearings began on October 16, 2007 and lasted a week. The panel issued its award on August 22, 2008. In a two-to-one decision, the panel ruled in appellants' favor, with McDade and Chapman as the majority and Ratliff dissenting. According to the PSA, the decision was “binding and nonappealable” except “as provided in the Federal Arbitration Act” (“FAA”).

Subsequently, Oxy discovered undisclosed information concerning McDade's and Beck Redden's relationships with appellants that Oxy claims was evidence of McDade's evident partiality. See 9 U.S.C.A. § 10(a)(2) (West 2009). Oxy filed a motion requesting the arbitration panel to vacate its award, but the arbitrators unanimously agreed they lacked jurisdiction to consider the motion. Appellants filed a motion in district court seeking to confirm the panel's award. Oxy countered, seeking to vacate the award based on McDade's alleged evident partiality. The trial court signed a final judgment denying appellants' motion to confirm the arbitration award and granting Oxy's motion to vacate. The court also issued findings of fact and conclusions of law.

II. Standard of Review and Applicable Law

We begin with consideration of the trial court's standard for determining whether to confirm or vacate an arbitration award. Review of an arbitration award is “extraordinarily narrow.” Statewide Remodeling, Inc. v. Williams, 244 S.W.3d 564, 568 (Tex.App.-Dallas 2008, no pet.). The award has the same effect as a judgment of last resort, and all reasonable presumptions are indulged in favor of the award. CVN Grp., Inc. v. Delgado, 95 S.W.3d 234, 238 (Tex.2002) (quoting City of San Antonio v. McKenzie Constr. Co., 136 Tex. 315, 326 150 S.W.2d 989, 996 (1941)). An arbitration award governed by the FAA must be confirmed unless it is vacated, modified, or corrected under certain limited grounds. See 9 U.S.C.A. § 9 (West 2009); Thomas James Assocs., Inc. v. Owens, 1 S.W.3d 315, 319–20 (Tex.App.-Dallas 1999, no pet.). A party seeking to vacate an arbitration award bears the burden of presenting a complete record that establishes grounds for vacatur. Williams, 244 S.W.3d at 568. Under one such ground, a trial court may vacate an arbitration award “where there was evident partiality or corruption in the arbitrators, or either of them.” 9 U.S.C.A. § 10(a)(2).

The parties sharply disagree on the legal standard a Texas court should apply when considering whether an arbitrator was evidently partial under the FAA. Both sides recognize the United States Supreme Court's seminal evident-partiality decision, Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 89 S.Ct. 337, 21 L.Ed.2d 301 (1968). In Commonwealth Coatings, a supposedly neutral arbitrator failed to disclose that one of the parties to the arbitration was a regular customer of his engineering-consulting services, including on the projects underlying the parties' dispute. Id. at 146, 89 S.Ct. 337. In vacating the arbitration award, Justice Black wrote in an opinion joined by three justices:

It is true that arbitrators cannot sever all their ties with the business world, since they are not expected to get all their income from their work deciding cases, but we should, if anything, be even more scrupulous to safeguard the impartiality of arbitrators than judges, since the former have completely free rein to decide the law as well as the facts and are not subject to appellate review. We can perceive no way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias.

Id. at 148–49, 89 S.Ct. 337 (emphasis added). This principle is known as the “impression of possible bias” or “appearance of bias” standard.

In a concurring opinion joined by two justices, Justice White began, “While I am glad to join my Brother Black's opinion in this case, I desire to make these additional remarks.” Id. at 150, 89 S.Ct. 337 (White, J., concurring). Justice White expressed that “arbitrators are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance, or if they are unaware of the facts but the relationship is trivial.” Id. at 150, 89 S.Ct. 337 (White, J., concurring). He further wrote,

Of course, an arbitrator's business relationships may be diverse indeed, involving more or less remote commercial connections with great numbers of people. He cannot be expected to provide the parties with his complete and unexpurgated business biography. But it is enough for present purposes to hold, as the Court does, that where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed.

Id. at 151–52, 89 S.Ct. 337 (White, J., concurring).

The majority of federal circuits have construed Justice Black's opinion as a mere plurality because, although Justice White stated that he joined Justice Black's opinion, the “substantial interest” standard announced by Justice White differed substantially from the “appearance of bias” standard utilized by Justice Black. See, e.g., Positive Software Solutions, Inc. v. New Century Mortg. Corp., 476 F.3d 278, 281–83 (5th Cir.2007) (en banc) (explaining that the majority of federal circuits have concluded that Justice Black's opinion is a non-binding plurality decision and adopted a more stringent standard); see also Merrick T. Rossein & Jennifer Hope, Disclosure and Disqualification Standards for Neutral Arbitrators: How Far to Cast the Net and What Is Sufficient to Vacate Award, 81 St. John's L. Rev. 203, 212–13 (2007) (discussing split among federal circuits). Unsurprisingly, appellants seek application of the “substantial interest” standard, whereas Oxy urges application of the “appearance of bias” standard.

Appellants urge us to apply the standard recently annunciated by the Fifth Circuit in Positive Software. In Positive Software, after thoroughly analyzing Justice Black's and Justice White's opinions, the court concluded that Justice Black's opinion was a non-binding plurality opinion and that the proper standard for determining evident partiality under the FAA is whether a nondisclosure “involves a significant compromising relationship.” Id. at 281–86. Of course, we need not follow Positive Software because Fifth Circuit opinions are persuasive, but not mandatory, precedent in Texas courts. See Penrod Drilling Corp. v. Williams, 868 S.W.2d 294, 296 (Tex.1993). However, we are required to follow applicable precedent from the Texas Supreme Court. Id.

In Burlington N. R.R. Co. v. TUCO, Inc., the Texas Supreme Court reviewed an arbitration award for evident partiality under the Texas Arbitration Act (“TAA”). 960 S.W.2d 629, 632 (Tex.1997). In determining the proper standard for determining evident partiality, the court relied primarily...