Texas Court of Appeals Reversed Vacatur of $125 Million Arbitration Award

by Jeremy Clare

The Court of Appeals for the Fifth District of Texas at Dallas reversed the district court’s vacatur of a $125 million arbitration award and confirmed the award because the appellee failed to raise its complaint during the arbitration process.

Background

In Ponderosa Pine Energy, LLC, v. Tenaska Energy, Inc., et al, No. 05-10-00516-CV (Tex.App.—Dallas August 20, 2012), an arbitration panel awarded Ponderosa Pine Energy, LLC (“Ponderosa”) $125 million in a 2-1 decision against Tenaska Energy, Inc., et al (“Tenaska”). Ponderosa was represented by Frank Penski and Constance Boland, attorneys at Nixon Peabody LLP. Prior to the arbitration hearing, Samuel Stern, the arbitrator selected by Ponderosa, disclosed that (1) he was appointed as an arbitrator by a party represented by Nixon Peabody that resulted in a favorable outcome for that party; (2) on May 3, 2006 he participated in a meeting at the Nixon Peabody offices in his capacity as a member of the Advisory Board of Lexsite, an Indian company which provides support to law firms; (3) on June 19, 2006, he was appointed as an arbitrator by a party, on the recommendation of Nixon Peabody, in an unrelated arbitrator; (4) on June 26, 2006, he was appointed as an arbitrator by Ponderosa for this arbitration, on the recommendation of Nixon Peabody; and (5) on July 12, 2006, he was appointed as an arbitrator by a party, on the recommendation of Nixon Peabody, in Ada Co. Generation LP (“Ada”) v. Amway Co.

District Court

After the panel awarded Ponderosa $125 million, Tenaska filed a motion to vacate the award alleging that Stern was not impartial and free from bias. Tenaska complained that (1) Stern did not disclose that Penski and Boland were his direct contacts at Nixon Peabody and they directed what Stern disclosed to the defendants; (2) Penski and Boland had business discussions on behalf of Nixon Peabody with Lexsite, and Stern had a direct financial interest in Lexsite’s success; and (3) Stern was appointed by Penski for the Ada arbitration and Ada was owned by Delta Power Co. LLC (“Delta”), a company that previously owned Ponderosa and a key player in the current dispute. The court ultimately vacated the award on the basis that Stern exhibited evident partiality by (1) failing to fully disclose the Lexsite and Nixon Peabody relationships and (2) failing to fully and completely disclose the relevant facts about the Ada arbitration.

Court of Appeals

On appeal, Ponderosa contended that Stern disclosed enough information regarding his relationship with the lawyers, Lexsite, and Ada, and by not investigating further or objecting, Tenaska waived any post-arbitration partiality complaint. The Court agreed. First, with regard to Stern’s relationships with Penski, Boland, and Lexsite, the Court concluded that Stern’s disclosure put Tenaska on notice of the possibility of partiality and a few obvious questions from Tenaska would have adduced the information that they subsequently complained about. Second, with regard to Stern’s relationship with the Ada arbitration, the Court concluded that the disclosure and subsequent evidence presented during the arbitration hearing put Tenaska on notice of Delta’s involvement in the Ada arbitration. Tenaska waived their complaint because they failed to object or ask questions before the award was issued. The Court thus reversed and rendered judgment confirming the award.

Jeremy Clare is a law clerk at Karl Bayer, Dispute Resolution Expert. Jeremy received his J.D. from the University of Texas School of Law in 2012 and received a B.A. from the University of South Carolina where he studied political science.