Federal District Court Opinions

TORCH E & P CO. v. J.M. HUBER CORP., (S.D.Tex. 12-20-2006)
TORCH E & P CO. and VELASCO GAS CO., LTD, Plaintiffs, v.
J.M. HUBER CORP., Defendant. CIVIL ACTION NO. H-06-1786.
United States District Court, S.D. Texas, Houston Division.
December 20, 2006


SIM LAKE, District Judge

Pending before the court are plaintiffs’ Original Complaint
to Vacate Arbitration Award (Docket Entry No. 1) and
defendant’s Motion to Confirm Arbitration Award (Docket
Entry No. 20). For the reasons stated below, the
arbitration award at issue will be confirmed.

I. Background

On August 17, 2000, plaintiffs, Torch E & P Company and
Velasco Gas Company, Ltd, entered into an agreement,
effective as of July 1, 2000, with defendant, J.M. Huber
Corporation, in which plaintiffs sold to defendant certain
producing mineral properties (“the properties”) in
Wyoming.[fn1] Paragraph 12.1 of the agreement set forth the
method for prorating the tax liabilities on the
properties. Page 2

Tax Prorations. Real and personal property taxes for the
Properties shall be prorated between the Buyer and Seller
as of the Effective Date. If the actual taxes are not
known on the Closing Date, Seller’s share of such taxes
shall be determined by using (a) the rates and millage for
the year prior to the year in which the Closing occurs,
with appropriate adjustments for any known and verifiable
changes thereto, and (b) the assessed values for the year
in which Closing occurs. When Buyer receives the actual
tax statements for the Properties from the appropriate
taxing authorities, Buyer shall deliver to Seller a copy
of such statements, together with the amount, if any, by
which Seller’s proration exceeds the proration that would
have been made had actual tax statements been used to
calculate Seller’s proration. If the proration for Seller
that would have been made using actual tax statements
exceeds that made at Closing, Seller shall pay to Buyer
such difference within three Business Days of receipt of
such statement.[fn2]

The agreement contains a clause requiring arbitration of
any “action, dispute, claim or controversy of any kind now
existing or hereafter arising between any of the parties .
. . in any way arising out of, pertaining to or in
connection with this Agreement.”[fn3] The agreement makes
Colorado law controlling and gives an arbitrator the power
to “impose sanctions and to take such other actions as the
arbitrators deem necessary to the same extent a judge could
impose sanctions or take such other actions pursuant to the
Federal Rules of Civil Procedure and applicable law.”[fn4]
Page 3

In 2004 defendant conducted an internal audit and
concluded that it had overpaid its share of taxes on the
properties.[fn5] In 2005, pursuant to the agreement’s
arbitration clauses, defendant filed a demand for
arbitration with the American Arbitration Association.

The arbitration hearing was conducted by an arbitrator
selected by the parties.[fn6] Prior to the hearing
plaintiffs filed a motion for summary disposition of the
case, citing Section 14.5 of the agreement, which stated,
in part:

14.5.2. None of the Buyer Indemnified Parties shall be
entitled to assert any right to indemnification hereunder
or to otherwise seek any damages or other remedies for or
in connection with . . . (c) any liabilities otherwise
arising in connection with or with respect to the
transaction contemplated in this Agreement until the
aggregate amount of the Liabilities for such
misrepresentation and breaches actually suffered by Buyer
with respect to Seller exceeds in the aggregate three
percent (3%) of the Adjusted Purchase Price, and then only
to the extent of such excess.[fn7]

14.5.3. After the Closing, any assertion by any Buyer
Indemnified Party that Seller is liable . . . (c) for
indemnity under the terms of this Agreement, or (d)
otherwise in connection with the transactions contemplated
in this Agreement, must be made by Buyer in writing and
must be given to each Seller on or prior to the last
preceding Business Day before the first anniversary of the
Closing Date. . . .[fn8] Page 4

. . .

14.5.6. The sole and exclusive remedy of each of the
[Buyer and Seller] with respect to the purchase and sale
of the Properties shall be pursuant to the express
indemnification provisions of this Section 14. Any and all
(a) claims relating to the . . . covenants and agreements
contained in this Agreement, (b) other claims pursuant to
or in connection with this agreement, or (c) other claims
relating to the Properties and the purchase and sale
thereof shall be subject to the provisions set forth in
this Section 14. . . .[fn9]

Plaintiffs argued that Section 14.5 precluded recovery by
defendant because the amount sought did not exceed three
percent of the purchase price and because the complaint was
filed after the date contemplated in Section 14.5.3.[fn10]
The arbitrator denied plaintiffs’ motion for summary
disposition, finding that the agreement to prorate taxes in
Section 12.1 “was not limited by nor affected by the
`basket’ liability of Section 14.5.2 nor the time limits
imposed by Section 14.5.3.”[fn11] According to the
arbitrator, Section 14.5.3 could not have been intended to
apply to the sharing of taxes “since the parties could not
have known, within the time constraints of said section,
what the taxes to be shared would have Page 5
been.”[fn12] The arbitrator concluded that Section 14.5.2
did not limit defendant’s claim because

[h]ad it been so intended, cross references or section
citations would have been easy to insert. Neither did the
parties so contemplate. The parties dealt separately with
the tax liabilities, not in accordance with the Purchase
Agreement and agreed to split the tax liabilities as each
envisioned fair and reasonable. Only when a dispute arose
did the parties attempt to invoke Section 14.5.2 or
Section 14.5.3. Whether or not each party’s action in this
regard is significant is a factual question, not yet

After denying plaintiffs’ motion for reconsideration,[fn14]
a hearing was held and the arbitrator subsequently awarded
defendant $471,972.12, including prejudgment interest and
attorney’s fees.[fn15] In his Final Award the arbitrator
concluded that the agreement was not ambiguous[fn16] and

[t]he provisions in Section 14 of the Agreement . . .
prohibiting claims which do not exceed such amounts simply
do not apply to the agreement of the parties to share ad
valorem taxes. . . . Neither the language of the Agreement
nor the conduct of the parties can be construed so to
provide. Furthermore, [plaintiffs’] argument that the
provisions of Section 14.5.3 compel a conclusion that
[defendant’s] demand was made beyond the period therein
provided, when analyzed, makes no Page 6 sense. Inasmuch
as Wyoming assesses ad valorem taxes in the year following
the production, it would have been impossible for such
section to have been employed. . . . Further proof of the
intention of the parties regarding adjustment of ad
valorem taxes and the fact that neither party considered
the limitations of Section 14 to apply to the tax
adjustments is the fact that, at a time beyond the
limitations imposed by Section 14.5.3 of the Agreement,
[plaintiffs] forwarded a final settlement statement and
county tax bills to [defendant] covering periods during
which [plaintiffs] owned the properties and [defendant]
paid the taxes, albeit such taxes were ultimately
determined to have been owed by [plaintiffs]. It is
therefore clear that the parties did not intend that the
limitations of Section 14 applied to ad valorem taxes,
[plaintiffs’] actions in this regard were inconsistent
with such an intention. The parties’ actions in this
regard were consistent with the Arbitrator’s conclusions
regarding interpretation of the language of the

Plaintiffs brought this action seeking to vacate the
arbitrator’s Final Award on the grounds that the arbitrator
exceeded his power and manifestly disregarded clearly
applicable legal principles that required dismissal of
defendant’s claims.[fn18]

II. Legal Standard

A court’s review of an arbitration award is deferential,
and the award can be vacated only on “very narrow grounds.”
Brabham v. Page 7 A.G. Edwards & Sons, Inc., 376 F.3d
377, 380 (5th Cir. 2004). The Federal Arbitration Act, 9
U.S.C. § 10(a), sets forth the four statutory bases
for vacating an arbitration award:

(1) where the award was procured by corruption, fraud, or
undue means;

(2) where there was evident partiality or corruption in
the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in
refusing to postpone the hearing, upon sufficient cause
shown, or in refusing to hear evidence pertinent and
material to the controversy; . . .; or

(4) where the arbitrators exceeded their powers . . .

In addition, the Fifth Circuit recognizes a nonstatutory
basis for vacating an arbitration award where the award is
in manifest disregard of the law and resulted in
“significant injustice.”[fn19] Kergosien v. Ocean Energy,
Inc., 390 F.3d 346, 353, 355 (5th Cir. 2004). An award may
not be vacated on the ground that it is arbitrary and
capricious. Brabham, 376 F.3d at 385.

III. Analysis

A. Did the Arbitrator Exceed His Power?

Plaintiffs first argue that the arbitrator’s award was
beyond his power because he refused to employ the
limitations of Section 14 of the Agreement.[fn20] This
refusal, plaintiffs claim, was contrary Page 8 to the
express contractual provisions and therefore should not be
respected.[fn21] The court disagrees.

Essentially, plaintiffs argue that the award is contrary to
the plain meaning of the Section 14 limitations.[fn22]
However, in interpreting the agreement the arbitrator
expressly concluded that Section 14 did not limit
defendant’s claim. Although the court might not have
reached the same conclusion regarding Section 14’s
applicability, this is not the test.

Respondent’s major argument seems to be that by applying
correct principles of law to the interpretation of the
[Agreement] it can be determined that the agreement did
not so provide, that therefore the arbitrator’s decision
was not based upon the contract. The acceptance of this
view would require courts even under the standard
arbitration clause to review the merits of every
construction of the contract. . . . The question of
interpretation of the [Agreement] is a question for the
arbitrator. It is the arbitrator’s construction which was
bargained for; and so far as the arbitrator’s decision
concerns the construction of the contract, the courts have
no business overruling him because their interpretation
of the contract is different than his.

Kergosien, 390 F.3d at 353 (quoting United Steelworkers of
America v. Enterprise Wheel & Car Corp., 80 S. Ct. 1358,
1360 (1960)) (emphasis in original). “[T]he single question
is whether the award, however arrived at, is rationally
inferable from the Page 9 contract.” Kergosien, 390 F.3d
at 353-54. Section 12.1 of the agreement contemplated
prorating property taxes after the closing date. As noted
by the arbitrator, the time limitation of Section 14.5.3
would have been impossible to comply with, given the fact
that the actual taxes would not be known within that time
period. The arbitrator also concluded that the language of
the agreement did not support a finding that Section
14.5.2’s “basket” limitation applied to the proration of
taxes, and that this interpretation was further supported
by the parties’ actions in connection with the agreement.
The award for prorated ad valorem taxes is therefore
rationally inferable from the agreement.

The cases cited by plaintiffs are distinguishable from the
facts in this case. In those cases courts held that the
arbitrator exceeded his power where the award was directly
contrary to the express terms of the agreements. See, e.g.,
Container Prod., Inc. v. United Steelworkers of America et
al., 873 F.2d 818 (5th Cir. 1989); Delta Queen Steamboat
Co. v. District 2 Marine Engineers and Beneficial Ass’n,
889 F.2d 559 (5th Cir. 1989); Houston Lighting & Power Co.
v. International Brotherhood of Elec. Workers, 71 F.3d 179
(5th Cir. 1995); Bruce Hardwood Floors v. UBC, Southern
Council of Industrial Workers, 103 F.3d 449 (5th Cir.
1997). Here, by contrast, the arbitrator acknowledged
Section 14 but concluded, as his authority under the
agreement permitted him to do, that it did not apply under
the facts of this case. Page 10

Because the arbitrator was interpreting the agreement in
determining that Section 14 did not limit defendant’s claim,
the court concludes that the arbitrator did not exceed his
power and, therefore, that the award cannot be vacated on
this ground.

B. Did the Arbitrator Manifestly Disregard the Law?

A nonstatutory basis for vacatur may arise if the
arbitrator’s award was in manifest disregard of the law.
The Fifth Circuit has held this to mean

more than error or misunderstanding with respect to the
law. The error must have been obvious and capable of being
readily and instantly perceived by the average person
qualified to serve as an arbitrator. Moreover, the term
“disregard” implies that the arbitrator appreciates the
existence of a clearly governing principle but decides to
ignore or pay no attention to it. Even if the arbitrator
did manifestly disregard the law, a second step of the
manifest disregard analysis requires that before an
arbitrator’s award can be vacated, the court must find
that the award resulted in a “significant injustice.”

Kergosien, 390 F.3d at 355 (internal quotations omitted).

Plaintiffs argue that clearly governing principles of
law[fn23] were made known to the arbitrator, which he
disregarded, thereby Page 11 meeting the first prong of
the test.[fn24] As for the second prong, plaintiffs argue
that an award contrary to plaintiffs’ view of the meaning
of the Section 14 limitations is itself a significant
injustice. Plaintiffs also point to defendant’s
“inequitable conduct” in failing to provide evidentiary
support at the hearings, waiting four years to serve notice
of its claim, changing its arguments during the proceeding,
and the fact that the claim was contrary to the liability
limitations in the agreement.[fn25] Plaintiffs allege that
“[a] significant injustice has been imposed on a party who
negotiated liability limitations in good faith and had the
reasonable expectation that they would be enforced, who is
now required to pay a sum of money which it does not owe,
to a party who sues on the agreement but seeks to have
controlling provisions ignored.”[fn26]

The court is not persuaded that the arbitrator manifestly
disregarded the law. The “legal principles” cited by
plaintiffs are canons of contract interpretation, not laws
dictating a contrary result. Presumably, the arbitrator
used these canons of interpretation in making his
determination that Section 14 of the agreement did not
limit defendant’s claims. Cf. Ryan Energy Tech. Page 12 et
al. v. CDG-MWD GP, LLC et al., 2006 WL 213916 (S.D. Tex.
2006) (holding that an arbitrator manifestly disregarded the
law where an arbitrator awarded attorney’s fees despite
there being no award of actual damages, and recovery of
actual damages was a prerequisite to recovery of attorney’s
fees under Texas law). Again, although the court might not
have come to the same conclusion, “[w]hen an arbitrator
resolves disputes regarding the application of a contract,
and no dishonesty is alleged, the arbitrator’s improvident,
even silly, fact-finding does not provide a basis for a
reviewing court to refuse to enforce the award.” Kergosien,
390 F.3d at 358 (internal quotations omitted).

Nor have plaintiffs persuaded the court that they suffered
a “substantial injustice” as a result of the award. In
determining whether a significant injustice has occurred,
the court considers “all the circumstances of the case,
including powers of arbitrators to judge norms appropriate
to the relations between the parties.” Bridas S.A.P.I.C. v.
Gov’t of Turkmenistan, 345 F.3d 347, 363 (5th Cir. 2003),
cert. denied, 124 S. Ct. 1660 (2004). Even if the
arbitrator had manifestly disregarded the law, such error
alone does not constitute a “substantial injustice.” If
this argument were accepted it would obviate the need for
the test’s second prong altogether. Plaintiffs do not argue
that the award was contrary to Section 12.1’s provision for
prorating taxes, only that Section 14 precluded defendant’s
claim altogether. The award orders Page 13 plaintiffs to
pay amounts they otherwise agreed to pay. Cf. One Beacon
America Ins. Co. v. Turner, 2006 WL 547959 (S.D. Tex. 2006)
(holding no substantial injustice existed where an insurer
was ordered to pay close to its policy limits after it had
ignored its own expert’s opinion by offering the insured
significantly less money). The court therefore concludes
that the plaintiffs have not met their burden with regard
to this nonstatutory basis for vacatur.[fn27]

IV. Conclusion

For the reasons stated above, the court concludes that
confirmation of the arbitration award is warranted.
Defendant’s Motion to Confirm the Arbitration Award (Docket
Entry No. 20) is therefore GRANTED, and plaintiffs’
complaint will be dismissed.

[fn1] Original Complaint to Vacate Arbitration Award, Docket
Entry No. 1, p. 2.

[fn2] Id. at Exhibit A1, Agreement for Purchase and Sale,
pp. 13-14 § 12.1.

[fn3] Id. at 33 § 28.1.

[fn4] Id. at 32 § 28.4.

[fn5] Original Complaint to Vacate Arbitration Award, Docket
Entry No. 1, pp. 5-6.

[fn6] Id. at 2-3.

[fn7] Id. at Exhibit A1, Agreement for Purchase and Sale, p.
17 § 14.5.2.

[fn8] Id. § 14.5.3.

[fn9] Id. at 18 § 14.5.6.

[fn10] Original Complaint to Vacate Arbitration Award,
Docket Entry No. 1, Exhibit A, Respondents’ Motion for
Summary Disposition, p. 3.

[fn11] Original Complaint to Vacate Arbitration Award,
Docket Entry No. 1, Exhibit B, Order, p. 1 § 4.

[fn12] Id. § 5.

[fn13] Id. at 2 § 7.

[fn14] Original Complaint to Vacate Arbitration Award,
Docket Entry No. 1, Exhibit C, Torch E & P Company and
Velasco gas Company, LTD’s Motion to Reconsider Summary
Disposition and Trial Brief.

[fn15] Original Complaint to Vacate Arbitration Award,
Docket Entry No. 1, Exhibit D, Final Award, p. 5.

[fn16] Id. at 2.

[fn17] Id. at 3.

[fn18] Original Complaint to Vacate Arbitration Award,
Docket Entry No. 1, p. 4. Plaintiffs also indicate that
they believe the award should be vacated because the
arbitrator was partial or corrupt, and because the
arbitrator refused to hear evidence pertinent and material
to the controversy. Id. However, plaintiffs’ motion does
not discuss any facts to support these allegations. As the
proponents of vacatur, plaintiffs have the burden of proof
on these issues and have failed to meet this burden.

[fn19] Another nonstatutory basis for vacatur is where the
award is contrary to public policy. Kergosien, 390 F.3d at
353. Plaintiffs do not challenge the award on this basis.

[fn20] Original Complaint to Vacate Arbitration Award,
Docket Entry No. 1, p. 8.

[fn21] Id.

[fn22] Plaintiffs do not suggest that the arbitrator
exceeded his authority by deciding issues that were not
submitted to arbitration.

[fn23] Plaintiffs allege the following principles were
disregarded by the arbitrator: Clear and unambiguous terms
of a contract must be given effect; every provision of a
contract must be given effect and conflicts avoided, if
possible; courts do not have the power to rewrite or
restructure the parties’ agreement; contractual condi-tions
precedent are enforceable; contracting parties have the
right to impose shorter limitations periods on contract
claims as long as such terms do not violate statutory
prohibitions or public policy; contracting parties have the
right to limit contract damage claims by aggregate
“basket” limitations; contracting parties are charged with
knowledge of applicable law. Original Complaint to Vacate
Arbitration Award, Docket Entry No. 1, p. 12.

[fn24] Original Complaint to Vacate Arbitration Award,
Docket Entry No. 1, pp. 12-13.

[fn25] Id. at 15.

[fn26] Id. at 16.

[fn27] Moreover, the facts stated by plaintiffs do not
constitute “inequitable conduct” by the defendant. There
was nothing unreasonable about the way the claim was
brought, nor is a party bound to assert the same arguments
throughout an arbitration proceeding.