Forest Oil Corp. v. El Rucio Land & Cattle Co.

• Decision Date: 24 July 2014
• Docket Number: No. 01–13–00040–CV.,01–13–00040–CV.
• Citation: 446 S.W.3d 58
• Parties: FOREST OIL CORPORATION, Appellant v. EL RUCIO LAND AND CATTLE COMPANY, INC., San Jacinto Land Partnership, Ltd., McAllen Trust Partnership, and James Argyle McAllen, Appellees.
• Court: Texas Court of Appeals

446 S.W.3d 58

FOREST OIL CORPORATION, Appellant

v.EL RUCIO LAND AND CATTLE COMPANY, INC., San Jacinto Land Partnership, Ltd., McAllen Trust Partnership, and James Argyle McAllen, Appellees.

No. 01–13–00040–CV.

Court of Appeals of Texas, Houston (1st Dist.).

July 24, 2014.

Rehearing Overruled Oct. 21, 2014.

Geoffrey L. Harrison, Susman Godrey LLP, Roger D. Townsend, Jennifer Josephson, Alexander Dubose & Townsend LLP, Houston, TX, Mitchell C. Chaney, Colvin, Chaney, Saenz & Rodriquez, LLP, Brownsville, TX, for Appellant.

William M. Parrish, Dinovo Price Ellwanger & Hard LLP, Austin, TX, Andrew L. Fono, Winstead P.C., Warren W. Harris, Jeffrey L. Oldham, J. Mark Little, Bracewell & Giuliani LLP, Houston, TX, G. Roland Love, Winstead P.C., Dallas, TX, Jon Christian Amberson, Larissa Janne Hood, Jon Christian Amberson, P.C., San Antonio, TX, for Appellees.

Panel consists of Justices JENNINGS, HIGLEY, and SHARP.

OPINION

LAURA CARTER HIGLEY, Justice.

Forest Oil Corporation appeals the trial court's judgment confirming a final arbitration award rendered against it in favor of El Rucio Land and Cattle Company, Inc., San Jacinto Land Partnership, Ltd., McAllen Trust Partnership, and James Argyle McAllen. Identifying five issues, Forest Oil asserts that the trial court erred in granting the motion to confirm the arbitration award. In support of its position, Forest Oil asserts that the Texas Railroad Commission had exclusive or primary jurisdiction over the dispute and contends that the arbitrators exceeded their authority in rendering the award. Forest Oil also avers that the award should be vacated based on evident partiality of one of the arbitrators. Finally, Forest Oil claims that the actual damages awarded by the arbitrators resulted from gross mistake or a manifest disregard for the law.

We affirm.

Background Summary

The 27,289.5–acre McAllen Ranch (“the Ranch”) lies in Hidalgo County, Texas. For many years, Forest Oil has held a mineral lease covering over 1,400 acres of the Ranch under which it has drilled for and produced natural gas. Forest Oil also operates a plant on the ranch, which processes the gas before it is placed in a pipeline for transport off the Ranch. The plant covers 5.75 acres.

In 2005, James Argyle McAllen, El Rucio Land and Cattle Company, Inc., San Jacinto Land Partnership, Ltd., and McAllen Trust Partnership (collectively, “the McAllens”) initiated a suit against Forest Oil. Based on their ownership of the Ranch, the McAllens sought to recover for environmental damage caused to the property by Forest Oil's operations. The McAllens alleged that Forest Oil had deposited hazardous materials on the Ranch, contaminating its soil and ground water. Included in these materials were mercury-contaminated iron sponge wood chips, a hazardous waste generated in the production of natural gas. The McAllens alleged that Forest Oil had improperly buried the mercury-contaminated waste at various locations on the Ranch. The McAllens also asserted that Forest Oil had improperly disposed of other hazardous materials on the property.

In addition, the McAllens claimed that Forest Oil had donated oilfield drilling pipe contaminated with naturally occurring radioactive material (commonly referred to as “NORM”) for the construction of pens to hold endangered rhinoceroses. The rhinoceroses were housed at an animal sanctuary located on a nearby property also owned by the McAllens, the Santillana Ranch. Although it had originated from the gas production on the McAllen Ranch, the pipe had been moved to the Santillana Ranch for construction of the pens.

The McAllens alleged that James Argyle McAllen (“Mr.McAllen”) had handled the NORM contaminated pipe in the construction of the rhinoceros pens. Mr. McAllen claimed that his exposure to the radioactive material had caused him to develop cancer in his leg, which ultimately necessitated the leg's amputation. The McAllens also alleged that the Ranch had been contaminated with radioactive waste.

Forest Oil moved to compel arbitration of the McAllens' environmental claims.¹ Forest Oil relied on an arbitration clause contained in a 1999 Settlement Agreement signed by Mr. McAllen in a separate lawsuit with Forest Oil from the 1990s. That suit involved a dispute over oil and gas royalties and leasehold development. The Settlement Agreement resolved the royalty and nondevelopment disputes, but the parties had expressly reserved the right to arbitrate, under the Texas General Arbitration Act, claims “for environmental liability, surface damages, personal injury, or wrongful death occurring at any time and relating to the McAllen Ranch Leases.” The parties also incorporated a separate “Surface Agreement” into the Settlement Agreement. The Surface Agreement provided for the ongoing care and remediation of the surface estate by Forest Oil.

The McAllens opposed Forest Oil's motion to arbitrate their environmental claims. Mr. McAllen asserted that the arbitration provision in the Settlement Agreement was unenforceable because he had been induced to sign it by fraud. Ultimately, the dispute regarding the arbitration agreement was resolved by the Supreme Court of Texas, which sided with Forest Oil. See Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 61 (Tex.2008). The supreme court held that the arbitration clause in the Settlement Agreement was enforceable. See id. at 62. Thus, the McAllens were required to arbitrate their environmental claims against Forest Oil.

The case proceeded to arbitration. The arbitration clause required the dispute to be decided by a panel of three neutral arbitrators. Each side chose one arbitrator. Forest Oil selected Daryl Bristow, and the McAllens chose Donato Ramos. The trial court appointed the third arbitrator, Clayton Hoover.

At the time of arbitration, the McAllens' live pleading identified various tort claims against Forest Oil, including negligence, gross negligence, trespass, nuisance, and fraud. The McAllens sought actual damages for environmental contamination to their property caused by Forest Oil's operations. The McAllens also requested they be awarded exemplary damages against Forest Oil.

In addition, the McAllens asserted a breach of contract claim. The McAllens alleged that Forest Oil had failed to comply with provisions of the Surface Agreement, incorporated into the Settlement Agreement, addressing Forest Oil's obligations with respect to the remediation of the surface estate. Based on their breach of contract claim, the McAllens requested attorney's fees in addition to actual damages.

Mr. McAllen also alleged a claim for civil assault against Forest Oil for his exposure to radiation from the pipes donated by Forest Oil to construct the rhinoceros pens. He sought damages for personal injury and mental anguish.

The hearing before the Arbitration Panel lasted for 17 days. Ultimately, two of three arbitrators found in favor of the McAllens. The arbitrator selected by Forest Oil, B. Daryl Bristow, dissented to the award in a written opinion.

The Arbitration Award provided, in part, as follows:

FINDINGS OF THE PANEL

1. El Rucio Land and Cattle Company, Inc., San Juanito Land Partnership, Ltd., McAllen Trust Partnership, and James Argyle McAllen (collectively the “Claimants”) are the owners in fee of certain ranchlands in Hidalgo County, Texas, known ... as the McAllen Ranch.

2. Respondent Forest Oil Corporation leases mineral rights on approximately 3,000 acres of the McAllen Ranch; the Forest leases cover approximately 1,500 acres ....

3. Forest Oil Corporation built and still operates a natural gas plant on approximately 5.75 acres of the McAllen Ranch.....

DECISIONS OF THE PANEL

5. The Panel hereby Orders, Adjudges and Decrees that Claimants are the prevailing parties in this matter and that Claimants El Rucio Land and Cattle Company, Inc., San Juanito Land Partnership, Ltd., and McAllen Trust Partnership are entitled to actual damages in the amount of $15,000,000 collectively. The Panel further hereby Orders, Adjudges and Decrees that Mr. James Argyle McAllen, Individually, is entitled to actual damages of $500,000.

6. The Panel hereby Orders, Adjudges and Decrees that Claimants have met their burden of proof as required by law for their claims of exemplary damages and hereby awards exemplary damages to Claimants in the total amount of $500,000.

7. The Panel hereby Orders, Adjudges and Decrees that Claimants are entitled to declaratory relief as requested regarding their rights and Forest Oil's obligations to Claimants under the 1999 Surface Agreement and hereby Orders, Adjudges and Decrees that:

a. Forest Oil has a continuing obligation and duty under the Surface Agreement to locate, remediate and dispose of all hazardous and non-hazardous materials from the McAllen Ranch related to Forest Oil's operations;

b. Forest Oil is required to perform remedial work where the need therefore arises, which shall include the removal of any and all hazardous and non-hazardous materials when those materials are no longer necessary in the conduct of Forest Oil's operations on the lease;

c. Forest Oil is solely responsible for reimbursing Claimants for any future costs and expenses incurred by Claimants in conducting investigations which result in the identification of additional locations requiring remediation of hazardous and non-hazardous materials on the McAllen Ranch resulting from Forest Oil's operations; and

d. Forest Oil is solely responsible for all future remediation costs and activities related to pollutants, contaminants, and hazardous and non-hazardous materials that are known to be present and/or discovered under those lands covered by the Surface Agreement.

The arbitrators also awarded the McAllens attorney's fees totaling $5,017,374. The Arbitration Award required Forest Oil to post a $10,000,000 bond.

In his dissent to the Award, Arbitrator Bristow criticized the panel majority for not specifying the basis for the damages awarded. He also opined that the majority's decision...