Lower Colo. River Auth. v. Papalote Creek II, L.L.C., 16-50317

• Decision Date: 31 May 2017
• Docket Number: No. 16-50317,16-50317
• Citation: 858 F.3d 916
• Parties: LOWER COLORADO RIVER AUTHORITY, Plaintiff-Appellee v. PAPALOTE CREEK II, L.L.C., formerly known as Papalote Creek Wind Farm II, L.L.C., Defendant-Appellant
• Court: U.S. Court of Appeals — Fifth Circuit

858 F.3d 916

LOWER COLORADO RIVER AUTHORITY, Plaintiff-Appellee

v.PAPALOTE CREEK II, L.L.C., formerly known as Papalote Creek Wind Farm II, L.L.C., Defendant-Appellant

No. 16-50317

United States Court of Appeals, Fifth Circuit.

Filed May 31, 2017

Robert Kenneth Wise, Lillard Wise Szygenda, P.L.L.C., Dallas, TX, James N. Rader, Esq., Lower Colorado River Authority, Legal Authority, Austin, TX, for Plaintiff-Appellee.

Benjamin Lee Mesches, Jason Neal Jordan, Haynes & Boone, L.L.P., Dallas, TX, Leslie Conant Thorne, Attorney, Haynes & Boone, L.L.P., Austin, TX, for Defendant-Appellant.

Before KING, JOLLY, and PRADO, Circuit Judges.

KING, Circuit Judge:

This appeal concerns the district court's grant of a petition to compel arbitration. Defendant–Appellant Papalote Creek II, L.L.C. argues that that the district court did not have jurisdiction to compel arbitration because the underlying dispute between the parties was not ripe, and even if the district court did have jurisdiction, the underlying dispute was outside the scope of the arbitration provision. Because we conclude that the district court lacked jurisdiction to compel arbitration, we VACATE and REMAND.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. The Power Purchase Agreement

Plaintiff–Appellee Lower Colorado River Authority (LCRA) is a conservation and reclamation district based in Austin, Texas, and a political subdivision of the State of Texas. LCRA sells wholesale electric power to municipal-owned utilities and electric cooperatives in Texas. In December 2009, LCRA entered into a Power Purchase Agreement (PPA) with Defendant–Appellant Papalote Creek II, L.L.C. (Papalote), a Delaware limited liability company that builds and operates wind farms. Papalote planned to build an 87-turbine wind farm in Texas (the Project), and under the PPA, LCRA agreed to purchase all of the energy generated by the Project at a fixed price for an 18-year term.

Relevant to this appeal are four sections of the PPA: § 4.3, § 9.3, § 13.1, and § 13.2. First, § 4.3, which is entitled "Liquidated Damages Due to [LCRA's] Failure to Take," provides a formula for how to calculate the liquidated damages that LCRA would owe to Papalote in the event that LCRA failed to take all of the Project's energy. As noted above, LCRA is required to take all of the energy generated by the Project. However, should LCRA fail to do so, § 4.3 details how to calculate Papalote's "exclusive remedy" of liquidated damages. This liquidated damages calculation would depend in part on the difference between the PPA's fixed price and the price that Papalote is otherwise able to obtain in selling the energy.

Second, § 9.3, which is entitled "Limitation on Damages for Certain Types of Failures," provides the following:

Notwithstanding anything to the contrary in [the PPA], [Papalote's] aggregate liability for (i) failure of [Papalote] to construct the Project and/or (ii) failure of one hundred percent (100%) of the Project's Turbines to achieve the Commercial Operation Date on the Scheduled COD and/or (iii) failure of one hundred percent (100%) of the Project's Turbines to achieve the Commercial Operation Date on June 1, 2011 and/or (iv) a Termination Payment, shall be limited in the aggregate to sixty million dollars ($60,000,000). [LCRA's] damages for failure to perform its material obligations under [the PPA] shall likewise be limited in the aggregate to sixty million dollars ($60,000,000).

(Emphasis added.) Notably, § 9.3 refers to Papalote's "liability" and LCRA's "damages," and the parties' underlying dispute is based, in part, on this word choice.

Finally, § 13.1 and § 13.2 provide a two-step arbitration procedure. The first step, as dictated in § 13.1, requires, inter alia , that "[i]f any dispute arises with respect to either Party's performance hereunder," the senior officers of LCRA and Papalote meet in an attempt to resolve the dispute. Under the second step, as outlined in § 13.2, if the dispute is not resolved through the first step within a certain timeframe, either party may submit that dispute "to binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ... effective at the time of the dispute." Section 13.2 also provides additional details on the arbitration, including that the arbitrator shall use a "baseball" procedure (in which each party puts forth an offer and the arbitrator is limited to choosing one of the two offers).

B. Negotiations and Petition to Compel Arbitration

Papalote completed construction of the Project in 2010, and in the ensuing years, LCRA complied with its obligations under the PPA by purchasing all of the energy generated by the Project. In April 2015, however, LCRA initiated discussions with Papalote regarding the PPA. Although the parties dispute the precise nature of these discussions,¹ neither party appears to have threatened to breach the PPA. Ultimately, in June 2015, LCRA sent Papalote a letter stating that, pursuant to § 13.2, LCRA was "initiat[ing] the arbitration process to resolve the dispute between LCRA and Papalote regarding LCRA's limitation of liability under the PPA and its impact on LCRA's performance obligations." LCRA also noted that it "intends to continue to fully perform its obligations under the PPA during this arbitration process." After Papalote requested more information about the purported dispute, LCRA sent another letter explaining that the dispute was "whether LCRA's liability is limited to $60,000,000 under the PPA." Papalote rejected LCRA's request to proceed to arbitration, reasoning that "[a]n academic question about the damages LCRA might owe for a hypothetical breach simply does not constitute a ‘dispute’ that is proper for arbitration under the PPA." Papalote also argued that a dispute over LCRA's potential liability limitation was not covered by the arbitration provision in the PPA, which was limited to disputes regarding performance obligations.

Following Papalote's refusal to arbitrate, LCRA filed a petition to compel arbitration in Texas state court on June 30, 2015. Papalote timely removed the petition to federal district court on the basis of diversity jurisdiction. In the district court, Papalote opposed the petition to compel by arguing that the dispute at issue did not fall within the scope of the arbitration provision. According to Papalote, the arbitration provision only includes disputes related to the parties' performance obligations, and LCRA's dispute regarding whether its liability is capped under § 9.3 is not a performance obligation. Papalote also challenged the ripeness of the dispute in passing, arguing that, "if the Court would prefer to deny the [petition to compel] based on the lack of a ripe dispute, it may do so consistent with the facts presented and without running afoul of any binding authority."

In February 2016, the district court granted LCRA's petition to compel arbitration. As an initial matter, the district court noted that both parties agreed that the PPA's arbitration provision was valid and enforceable, and thus, the only question was whether the dispute fell within the scope of the arbitration provision. The district court then rejected LCRA's argument that the arbitration provision covered any dispute arising under the PPA. Instead, the district court found that, under § 13.1, the parties had agreed to arbitrate only disputes that "arise[ ] with respect to either Party's performance." (Alteration in original.) Thus, the district court framed the question as "whether the dispute LCRA seeks to arbitrate—whether or not LCRA's liability would be capped at $60 million in the event it elected to purchase from Papalote less than the total amount of energy it contracted to buy—qualifies as a dispute ‘with respect to either Party's performance’ under the PPA." In answering that question, the district court recognized that, "in a certain sense, one could understand ‘performance’ to concern only those promises which were the essence of the PPA—the sale and production of wind energy—and conceptualize the buyer's obligation to pay for failing to take as compensation for its failure to perform, rather than as an independent performance obligation." The district court reasoned, however, that "the better view here ... is that LCRA's bargained-for obligation to pay Papalote a specified sum if LCRA takes less than all of the energy produced is itself a performance obligation under the PPA." According to the district court, LCRA's failure to take all of the Project's energy was not necessarily itself a breach giving Papalote the right to terminate the PPA. Instead, the PPA allows the parties' obligations to continue so long as LCRA pays liquidated damages, and if LCRA fails to make the necessary liquidated damages payment, only then would "that failure ... constitute an ‘Event of Default’ permitting Papalote to suspend its performance and terminate the [PPA]." As for Papalote's ripeness argument, the district court recognized that "ripeness questions plainly loom." However, the district court declined to further address whether ripeness should be decided by the arbitrator or the court because the parties had failed to adequately brief the issue. Papalote timely appealed.²

C. Arbitration and Subsequent Developments

Following the district court's order compelling arbitration, the parties proceeded through arbitration. Besides its arguments on the merits, Papalote also argued that the arbitrator should dismiss the claim because it was not ripe. On June 28, 2016, the arbitrator issued a decision in favor of LCRA. Specifically, the arbitrator found that, "[u]nder [§] 9.3 of the ... [PPA], LCRA's liability for liquidated damages and/or a Termination Payment for its failure to take power under the agreement is limited to $60,000,000." The arbitrator did not directly address Papalote's ripeness argument.

On October 10, 2016, LCRA notified Papalote that it would cease taking energy under...