Ponderosa Pine Energy, LLC v. Tenaska Energy, Inc.
| Decision Date | 20 August 2012 |
| Docket Number | No. 05–10–00516–CV.,05–10–00516–CV. |
| Parties | PONDEROSA PINE ENERGY, LLC, Appellant v. TENASKA ENERGY, INC., Tenaska Energy Holdings, LLC, Tenaska Cleburne, LLC, Continental Energy Services, Inc., and Illinova Generating Co., Appellees. |
| Court | Texas Court of Appeals |
OPINION TEXT STARTS HERE
Michael W. Huddleston, Shannon, Gracey, Ratliff & Miller, L.L.P., Dallas, TX, B. Frank Cain, Shannon, Gracey, Ratliff & Miller, L.L.P., Fort Worth, TX, Gregory S. Coleman, Marc S. Tabolsky, Edward C. Dawson, Ryan P. Bates, Reagan W. Simpson, Yetter Coleman, LLP, Austin, TX, for Appellant.
Howard I. Close, Patrick McAndrew, Wanda McKee Fowler, Wright & Close, LLP, Houston, TX, Mike A. Hatchell, Locke Lord Bissell & Liddell LLP, John J. Mcketta, III, Graves Dougherty Hearon & Moody, William W. Dibrell, Graves Dougherty Hearon & Moody, Austin, TX, Bryce Quine, Bradley C. Knapp, Locke Lord Bissell & Liddell LLP, Bradley C. Weber, Carmen S. Mitchell, Mitchell, Goff & Mitchell, LLP, Deborah G. Hankinson, Dallas, TX, for Appellees.
Before Justices BRIDGES, FRANCIS,1 and LANG.
Ponderosa Pine Energy, LLC, appeals the trial court's order vacating a $125 million arbitration award in its favor on the ground of one arbitrator's evident partiality. In a single issue, Ponderosa contends the trial court's ruling is error because the arbitrator disclosed relationships with the parties and their counsel sufficient to put appellees on notice of the facts giving rise to what they now contend is a reasonable possibility of partiality and, despite having the opportunity, appellees did not object or seek additional information about those relationships. After reviewing the record and considering the applicable law, we agree with Ponderosa. Accordingly, we reverse the trial court's order vacating the award and render judgment confirming the arbitration award.
This controversy arose out of the sale of a Cleburne, Texas electric-generating power plant to Ponderosa by appellees Tenaska Energy, Inc., Tenaska Energy Holdings, LLC, Tenaska Cleburne LLC, Continental Energy Services, Inc., and Illinova Generating Co. The purchase agreement contained a broad arbitration clause requiring the parties to arbitrate any dispute arising out of or related to the agreement. It called for arbitration before a panel of three arbitrators, one designated by each party and a third selected by the two designated arbitrators. The agreement also called for arbitration to be conducted under American Arbitration Association (AAA) rules, but without AAA administration. Finally, it contained a “baseball arbitration” provision whereby each party was to submit a proposed settlement, and the arbitration panel was then limited to selecting one of the two proposals submitted for the award. The parties agree that the arbitrators were to be neutral.
A dispute arose between the parties over whether appellees were required to indemnify Ponderosa for breaching representations and warranties under the purchase agreement. On June 23, 2006, Ponderosa filed a statement of claim demanding arbitration and asserting indemnity rights of more than $200 million. Ponderosa was represented by Frank Penski and Constance Boland of the New York law firm Nixon Peabody LLP. In accordance with the purchase agreement's arbitration clause, Ponderosa advised appellees in writing on June 27 that it had designated Samuel A. Stern, a Washington, D.C. lawyer with Hills & Stern LLP, as arbitrator. Ponderosa attached Stern's eight-page CV, which showed among other things that he had served as assistant counsel to the Warren Commission and was previously a partner at Wilmer, Cutler & Pickering in Washington, D.C., for twenty-six years. Additionally, his CV showed he had an international and corporate practice with emphasis on foreign investment and trade, corporate governance, structuring and project financing of ventures in emerging and transitional countries, licensing and distribution arrangements, and international commercial arbitration. In addition to advising more than twenty foreign governments on project-finance issues, he was a director of several close companies “with various involvements” in the Third World, including an Indian company, Lexsite.com. On August 2, 2006, five weeks after Ponderosa designated Stern, Penski provided appellees with Stern's disclosure statement describing “all” of his contacts with Nixon Peabody. In the statement, Stern disclosed the following:
In February 2002, I was appointed an arbitrator by the claimant in an AAA arbitration. Nixon Peabody represented the claimant. The panel issued a final arbitration award in favor of claimant. Thereafter, I understand that the case settled.
On May 3, 2006, I participated in a general discussion at the Nixon Peabody offices on the possible outsourcing of certain discovery tasks in litigation. I attended as a member of the Advisory Board of Lexsite, an Indian company which provides support to legal publishers, corporations, and law firms. Nixon–Peabody and Lexsite have done no business, and it is not clear that Nixon–Peabody would ever have any business to give Lexsite.
On June 19, 2006, I was appointed an arbitrator by the respondent, on the recommendation of Nixon Peabody, in J3 Technologies Corporation v. Dynamics Research Corporation. This has not commenced.
On June 26, 2006, I was appointed an arbitrator by claimant, on the recommendation of Nixon Peabody, in Ponderosa Pine Energy, LLC v. Tenaska Energy.
On July 12, 2006, I was appointed an arbitrator by the claimant, on the recommendationof Nixon–Peabody [sic], in Ada Co. Generation Limited.
Appellees did not seek additional information on the contacts disclosed. However, the next day they responded by letter seeking other information:
Mr. Stern's disclosure statement is not sufficient. While it reveals his prior and current contacts with Nixon Peabody, Mr. Stern's statement says nothing about his contacts or relationships with any of the parties or their representatives (except your firm). Rule R–16 of AAA's Commercial Arbitration Rules requires that any person appointed an arbitrator shall disclose any circumstance likely to give rise to justifiable doubt about the arbitrator's impartiality or independence, including, among other things, “any past or present relationship with the parties or their representatives ...” Given Mr. Stern's extensive experience in the fields of international finance and foreign investment and trade, it is not unreasonable to think he had or has contacts and/or relationships with some of the other parties here, including in particular the bank entities that now own [Ponderosa].
Please ask Mr. Stern to prepare and submit a comprehensive and compliant disclosure statement.
In response, Stern filed a supplemental statement in which he said he had “no professional or other relationship” with sixteen listed financial institutions and companies that had some connection to the underlying sale of the Cleburne plant. Thereafter, Stern and appellees' designated arbitrator, Thomas S. Fraser, selected the late Honorable James A. Baker, retired Texas Supreme Court justice, as the third arbitrator. Justice Baker ultimately served as panel chair.
Early in the process, the parties appeared at a preliminary conference that resulted in a scheduling and procedural order for the arbitration. The order prohibited any ex parte communications with any member of the panel on or after September 22, 2006, and set the dates for the evidentiary hearing. Additionally, at the urging of Justice Baker, the order contained a waiver of conflicts provision in which the parties and the arbitrators confirmed that they “(i) fully disclosed all conflicts of interest and potential conflicts of interest, with respect to the designation of the members of the panel in this Arbitration; and (ii) knowingly waive any and all conflicts of interest and/or potential conflicts of interest, relating to the designation of the members of the Panel in this Arbitration.” The parties then engaged in extensive discovery and, as required by the purchase agreement, submitted settlement proposals. Ponderosa submitted a settlement amount of $125 million, and appellees cumulatively submitted an amount of $1.2 million.
The hearing began in March 2007. The panel heard five days of testimony. Ponderosa presented three fact witnesses, two damages experts, a project finance expert, and lead counsel on attorney's fees. Appellees presented three fact witnesses and a damages expert. On May 7, 2007, the panel issued a twenty-three-page opinion and award in Ponderosa's favor. The 2–1 decision, with Fraser dissenting, concluded that appellees breached warranties in the purchase agreement and awarded Ponderosa the “baseball amount” of $125 million. On the day the opinion issued, Ponderosa filed a petition to confirm the award in state district court.
That same month, after the opinion and award issued, appellees hired an international private investigation firm to investigate Stern. Thereafter, they filed motions to vacate the award alleging, among other things, that while all three arbitrators were supposed to be “impartial in every respect and free from bias,” Stern was neither. In an amended motion, appellees asserted that Stern's disclosure statement, which appellees alleged was edited by Nixon Peabody lawyers Penski and Boland, omitted material facts. In part, appellees complained that (1) Stern failed to disclose that his contacts with Nixon Peabody, a 700–lawyer firm, were with Penski and Boland, personally, and that he permitted them to “direct what he did and did not disclose to the defendants”; (2) at Stern's urging and initial participation, Penski and Boland had contemporaneous business discussions on behalf of Nixon Peabody with Lexsite, an Indian litigation support company in which Stern had a “direct and continuing financial interest, going...
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Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC
...court of appeals that all three arbitrators were required to be neutral, which follows the current default protocol in arbitration. 376 S.W.3d 358, 361. The clause called for arbitration under the American Arbitration Association (AAA) rules but without AAA administration. It also contained......