Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC

• Decision Date: 22 August 2014
• Docket Number: No. 12–0789.,12–0789.
• Citation: 437 S.W.3d 518,57 Tex. Sup. Ct. J. 617
• Parties: TENASKA ENERGY, INC., Tenaska Energy Holdings, LLC, Tenaska Cleburne, LLC, Continental Energy Services, Inc., and Illinova Generating Company, Petitioners, v. PONDEROSA PINE ENERGY, LLC, Respondent.
• Court: Texas Supreme Court

437 S.W.3d 518

57 Tex. Sup. Ct. J. 617

TENASKA ENERGY, INC., Tenaska Energy Holdings, LLC, Tenaska Cleburne, LLC, Continental Energy Services, Inc., and Illinova Generating Company, Petitioners,

v.PONDEROSA PINE ENERGY, LLC, Respondent.

No. 12–0789.

Supreme Court of Texas.

Argued Jan. 7, 2014.

Decided May 23, 2014.

Rehearing Denied Aug. 22, 2014.

Carmen S. Mitchell, Mitchell, Goff & Mitchell, L.L.P., Dallas, Howard L. Close, Patrick McAndrew, Wanda McKee Fowler, Wright & Close LLP, Houston, TX, for Petitioner Continental Energy Services, Inc.

Bradley C. Weber, Bradley Knapp, Bryce Christian Quine, Mike A. Hatchell, Locke Lord LLP, Dallas, TX, for Petitioner Illinova Generating Company.

Deborah G. Hankinson, Ryan D. Clinton, Hankinson LLP, Dallas, John J. ‘Mike’ McKetta III, William W. Dibrell, Graves Dougherty Hearon & Moody, P.C., Austin, for Petitioner Tenaska Energy, Inc.

B. Frank Cain, Shannon Gracey Ratliff & Miller LLP, Fort Worth, Marc S. Tabolsky, Reagan W. Simpson, Ryan Parker Bates, Yetter Coleman, LLP, Houston, Michael W. Huddleston, Munsch Hardt Kopf & Harr PC, Dallas, TX, Constance Boland, Frank Penski, New York, for Respondent.

Justice GUZMAN delivered the opinion of the Court.

Evident partiality of an arbitrator is a ground for vacating an arbitration award under both the Federal Arbitration Act and the Texas Arbitration Act. Adhering to United States Supreme Court precedent, we held almost two decades ago that a neutral arbitrator is evidently partial if she fails to disclose facts that might, to an objective observer, create a reasonable impression of her partiality. And we have held that a party does not waive an evident partiality challenge if it proceeds to arbitrate without knowledge of the undisclosed facts.

Today, we are asked to evaluate these standards in light of a partial disclosure. Here, the neutral arbitrator in question disclosed that the law firm representing one party to the arbitration had recommended him as an arbitrator in three other arbitrations. He also disclosed that he was a director of a litigation services company and attended a meeting at the law firm, but there was no indication the firm and company would ever do business. The trial court found the arbitrator failed to disclose that all of his contacts at the 700–lawyer firm were with the two lawyers that represented the party to the arbitration at issue; he owned stock in the litigation services company that was pursuing business opportunities with the firm; he served as the president of the company's United States subsidiary; he conducted significant marketing in the United States for the company; he had additional meetings or contacts with the two lawyers in question to solicit business from the firm for the company; and he allowed one of the two lawyers to edit his disclosures to minimize the contact. The trial court vacated the arbitration award, but the court of appeals reversed, concluding the party waived its evident partiality claim by failing to object or inquire further when the disclosures occurred. We hold the failure to disclose this additional information might yield a reasonable impression of the arbitrator's partiality to an objective observer. We further hold that because the party making the evident partiality challenge was unaware of the undisclosed information, it did not waive the claim. Accordingly, we reverse the court of appeals' judgment and reinstate the trial court's order vacating the award and requiring a new arbitration.

I. Background

Tenaska Energy, Inc., Tenaska Energy Holdings, LLC, Tenaska Cleburne, LLC, Continental Energy Services, Inc., and Illinova Generating Co. (collectively Tenaska) sold their interests in a power plant in Cleburne, Texas to Ponderosa Pine Energy, LLC (Ponderosa). The purchase agreement contained a broad arbitration clause requiring the parties to arbitrate any dispute arising from or related to the agreement. The clause provided for a three-arbitrator panel, with each party selecting one arbitrator and those two arbitrators selecting the third. The parties conceded in the 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 a “baseball arbitration” provision, in which each party would submit a proposed settlement and the panel was bound to select one of the two proposals.

After the transaction closed, the parties disputed whether the agreement required Tenaska to indemnify Ponderosa for breaching certain representations and warranties in the agreement. Ponderosa demanded arbitration and sought more than $200 million in indemnity rights. Lawyers from Nixon Peabody LLP's New York office represented Ponderosa, which designated Samuel A. Stern as its arbitrator. Stern's curriculum vitae was attached to his designation, which indicated he was a director of twelve closely held companies with third-world involvement-including a company in India named LexSite.¹

At the time, the AAA Commercial Arbitration Rules provided:

Any person appointed or to be appointed as an arbitrator shall disclose ... any circumstance likely to give rise to justifiable doubt as to the arbitrator's impartiality or independence, including any bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their representatives. Such obligation shall remain in effect throughout the arbitration.

Stern disclosed that Nixon Peabody had designated him as an arbitrator in three other proceedings, and that he—on behalf of LexSite—had a discussion at Nixon Peabody's offices about Nixon Peabody outsourcing litigation discovery tasks to LexSite. But the disclosures noted that “Nixon–Peabody and LexSite have done no business, and it is not clear that Nixon–Peabody would ever have any business to give LexSite.” In response, Tenaska asked if Stern had a relationship with any of the sixteen bank entities that own Ponderosa, and Stern replied that he had no such relationships.

Tenaska designated Thomas S. Fraser as its arbitrator, and Fraser and Stern selected James A. Baker ² as the third arbitrator. Tenaska asked Baker the same question it asked Stern, and Baker replied that his firm had represented some of the banks that own Ponderosa. At Baker's suggestion, the panel issued a scheduling order that contained a provision stating the parties had made full disclosures of actual and potential conflicts and knowingly waived actual and potential conflicts of interest. After extensive discovery, Ponderosa proposed a $125 million settlement and Tenaska proposed a $1.25 million settlement. A divided panel composed of Baker and Stern selected Ponderosa's $125 million settlement amount.

Ponderosa moved to confirm the award in state district court, and Tenaska moved to vacate it, asserting that Stern was neither impartial nor free from bias. After extensive discovery, the trial court held a hearing on the motions, where the parties admitted almost 500 exhibits. Those exhibits included the depositions of Stern, as well as Frank Penski and Constance Boland-the two lawyers at Nixon Peabody who represented Ponderosa.

The evidence showed that Stern was on the advisory board for LexSite, a legal outsourcing company in India that was seeking to obtain business from law firms in the United States. Stern gave LexSite business and legal advice, and owned 3,000 shares of LexSite stock. He was given options for an additional 10,000 shares, which he had not exercised. Stern contacted Penski in April 2006 to discuss the possibility of Nixon Peabody using LexSite's services. Stern arranged for Penski to meet LexSite's CEO that month. At the subsequent May 3 meeting at Nixon Peabody that Stern did disclose, he made several remarks, mostly asking the firm's associates for their impressions of performing discovery work. After the meeting concluded, Stern told Penski “if you have any arbitrations that would be fun, keep me in mind.”

On June 16, Penski asked Stern to serve as a neutral party arbitrator in a matter involving Ada Co–Generation. Stern responded by accepting the appointment and asked if there was “[a]ny movement there” with LexSite. Penski replied that he had talked to numerous partners at Nixon Peabody in an effort to find something to send to LexSite but had “no luck so far.” On the suggestion of Boland, another Nixon Peabody partner recommended Stern as an arbitrator in another arbitration on June 19. And on June 26, Penski recommended Stern as an arbitrator in this matter.

Boland later edited Stern's disclosures in two ways. First, she added the Ada–Cogeneration arbitration. Second, she added the disclaimer that “Nixon–Peabody and Lexsite have done no business, and it is not clear that Nixon–Peabody would ever have any business to give LexSite.”

After the parties agreed on the arbitrators, the scheduling order of October 23 established a waiver of conflicts. Three days later, Nixon Peabody changed its fee agreement with Ponderosa from an hourly rate to a contingency fee of 15% of the first $50 million and 12.5% of any amount over $50 million.

LexSite later changed its name to Exactus. Stern incorporated Exactus U.S. and was the chairman of its board.³ Stern charged LexSite $1,000 for use of his office and $5,000 per month for services. He also met with LexSite's CEO twice a month to discuss such topics as marketing.

LexSite's CEO continued to correspond with Boland during the arbitration. Boland informed LexSite's CEO in April 2007 that “we need to wait about one more month or so until we can continue our discussions. Would you be so kind as to send an email to me again on or about May 15?” LexSite's CEO agreed and noted he had recently met a lawyer from Nixon Peabody's Boston office, who Boland...