Denbury Onshore, LLC v. Texcal Energy S. Tex., L.P.

513 S.W.3d 511

DENBURY ONSHORE, LLC, Appellant

v.TEXCAL ENERGY SOUTH TEXAS, L.P., and Venoco, Inc., Appellees

NO. 14–15–00439–CV

Court of Appeals of Texas, Houston (14th Dist.).

Opinion filed December 6, 2016

Stephen L. Tatum, Fort Worth, TX, J. Albert Kroemer, Dallas, TX, Lionel M. Schooler, Houston, TX, for Appellant.

Aundrea Gulley, Barrett H. Reasoner, Houston, TX, for Appellees.

Panel consists of Chief Justice Frost, and Justices Boyce and Brown.

OPINION

Marc W. Brown, Justice

Denbury Onshore, LLC, challenges the district court's judgment confirming an arbitration award in favor of TexCal Energy South Texas, L.P., and Venoco, Inc. (collectively, Venoco), and denying Denbury's motion to vacate or modify the award. Finding no error, we affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

Denbury's business focuses on enhanced oil recovery using CO₂injection. Denbury owns CO₂deposits near Jackson, Mississippi, in fields known as Jackson Dome. TexCal, whose parent company is Venoco, owned a majority interest in certain producing mature oil and gas fields in Galveston and Brazoria Counties, Texas, known as Hastings. Denbury planned to acquire interests in oil and gas fields, starting with Hastings, and then supply CO₂from Jackson Dome to recover oil from such fields.

Denbury and Venoco began negotiations and, in November 2006, signed an Option Agreement. Venoco granted Denbury an option to purchase Venoco's majority interest in Hastings. Should Denbury exercise its option, Venoco would convey this interest.

Once Denbury recouped its investment and operating costs and began receiving revenue from oil produced from Hastings, or achieved "payout," Denbury would convey 25 percent of the conveyed interest back to Venoco. Calculation of this payout date was dependent on Denbury's "CO₂Costs," or the "direct cost of acquiring (commodity cost) and delivering (transportation cost) CO₂" to Hastings.¹ Effective January 2009, Denbury exercised its option and Venoco assigned its interest in Hastings to Denbury.

During the next two years, Denbury built the Green Pipeline to transport CO₂from Denbury's closest pipeline in Louisiana to Hastings and other fields in Texas at an actual cost of approximately $905 million. The Green Pipeline was designed and built to transport a capacity throughput of 800 MMcf per day. Denbury began charging its CO₂Costs against Venoco's payout account. In 2012, however, an audit revealed that Denbury was charging Venoco more than expected.

Pursuant to an arbitration provision in the Option Agreement, Venoco brought a claim in arbitration against Denbury for declaratory judgment. After an evidentiary hearing, the three-member neutral arbitration panel unanimously declared the meaning of the disputed language of the "transportation costs" and the "commodity costs" provisions of the Option Agreement and issued an award in Venoco's favor. The panel issued two modifications and clarifications to the award.

Denbury filed an application to modify and vacate the arbitration award in Harris County district court.² Denbury argued that the award was not based on sufficient evidence, exceeded the authority of the arbitrators, and was in manifest disregard of the law. In the application, Denbury asserted that "[t]he panel exceeded its powers by making an incorrect value judgment regarding the application of a contract clause." Denbury also indicated that Venoco and Denbury had contracted for judicial review of the arbitration award for reversible error as permitted by the Supreme Court of Texas's opinion in Nafta Traders, Inc. v. Quinn , 339 S.W.3d 84 (Tex. 2011), and that Denbury wanted the trial court to conduct such a review.

Venoco moved to confirm the arbitration award. After a hearing, the district court issued its order granting Venoco's motion to confirm and denying Denbury's motion to modify and vacate. Denbury appealed.

II. ANALYSIS

Overall, Denbury challenges the district court's grant of Venoco's motion to confirm the arbitration award and denial of Denbury's motion to modify or vacate the award. In particular, in its opening brief on appeal, Denbury argues that the district court erred by applying the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 et seq. , instead of the Texas General Arbitration Act (TAA), Tex. Civ. Prac. & Rem. Code Ann. § 171.001 et seq. (West 2011), to the agreement, effectively negating the parties' clear intent to allow the trial court to review the arbitration award for reversible error, and by failing to adhere to the holding in Nafta Traders to conduct expanded judicial review. Denbury further contends that the panel's declarations of the meaning of "commodity costs" and "transportation costs" in the award are not supported by legally or factually sufficient evidence, and the district court erred by not setting aside those portions of the award. Finally, if this court determines this matter is governed by the FAA, then Denbury maintains that the arbitration panel exceeded its powers or so imperfectly executed them that a mutual, final, and definite award was not made.

However, Denbury no longer appeals the panel's declaration of the meaning of the "commodity costs" provision, but rather only its declaration of the meaning of the "transportation costs" provision. In its reply brief, Denbury notified this court that "[i]n light of the Supreme Court's decision in Hoskins [v. Hoskins , 497 S.W.3d 490 (Tex. 2016) ]," Denbury is no longer challenging the trial court's judgment based on any argument "with respect to that portion of the Panel's Award denying Denbury recovery of its Depreciation, Depletion and Amortization (DD&A) as a cost of producing CO₂."

We review de novo a trial court's decision to confirm or vacate an arbitration award under the FAA or the TAA. D.R. Horton–Tex., Ltd. v. Bernhard , 423 S.W.3d 532, 534 (Tex. App.–Houston [14th Dist.] 2014, pet. denied) (TAA); Amoco D.T. Co. v. Occidental Petroleum Corp. , 343 S.W.3d 837, 844 (Tex. App.–Houston [14th Dist.] 2011, pet. denied) (FAA). Review of an arbitration award is extraordinarily narrow. Patel v. Moin , No. 14–15–00851–CV, 2016 WL 4254016, at *2 (Tex. App.–Houston [14th Dist.] Aug. 11, 2016, pet. filed) (mem. op.) (TAA); Amoco D.T. , 343 S.W.3d at 841. All reasonable preferences are indulged in favor of the award. Patel , 2016 WL 4254016, at *3 ; Amoco D.T. , 343 S.W.3d at 841. A party seeking to vacate an award bears the burden of presenting a complete record that establishes grounds for vacatur. Patel , 2016 WL 4254016, at *2 ; Amoco D.T. , 343 S.W.3d at 841.

An arbitration award governed by the FAA or the TAA must be confirmed unless it is vacated, modified, or corrected under certain limited grounds. See 9 U.S.C. § 9 ; Tex. Civ. Prac. & Rem. Code Ann. § 171.087. An arbitration award shall be vacated under the FAA upon application only when the award was procured by corruption, fraud, or undue means; there was evident partiality or corruption in the arbitrators; the arbitrators were guilty of misconduct in refusing to postpone the hearing for sufficient cause, in refusing to hear pertinent and material evidence, or any other misbehavior which prejudiced any party's rights; or the arbitrators exceeded their powers or so imperfectly executed them that a mutual, final, and definite award was not made. 9 U.S.C. § 10(a) ; Hall St. Assocs., L.L.C. v. Mattel, Inc. , 552 U.S. 576, 584, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008).

An arbitration award shall be vacated under the TAA upon application only when the award was obtained by corruption, fraud, or undue means; the rights of a party were prejudiced by evident partiality by an arbitrator appointed as a neutral arbitrator, corruption in an arbitrator, or misconduct or willful misbehavior by an arbitrator; the arbitrators exceeded their powers, refused to postpone the hearing after a showing of sufficient cause for postponement, refused to hear material evidence, or conducted the hearing in a manner that was contrary to one of five sections of the TAA and that substantially prejudiced the rights of a party; or there was no agreement to arbitrate, the issue was not adversely determined in a proceeding to compel or stay arbitration, and the party did not participate in the arbitration hearing without raising the objection. Tex. Civ. Prac. & Rem. Code Ann. § 171.088(a) ; Hoskins , 497 S.W.3d at 494.

A. The parties' arbitration agreement

In section 19.12, "Mediation and Arbitration," the Option Agreement states:

The Parties stipulate and agree that any and all claims and/or controversies arising between [them] which relate to and arise out of this Agreement shall be resolved in accordance with the mediation and arbitration procedures set forth in Exhibit "P." The prevailing party in any legal proceeding or arbitration may be entitled to recover all arbitration costs and reasonable attorneys' fees from the non-prevailing party, as determined by the arbitrators in accordance with the procedures set forth in Exhibit "P."

In relevant part, Exhibit "P" provides:

The matter shall be decided by two (2) arbitrators (or three if required below) chosen in the manner set forth below, who shall be a licensed attorney at law in the State of Texas (in good standing with the State Bar of Texas) and knowledgeable about the subject matter of the dispute. Except to the extent inconsistent with the provisions hereof, the arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1, et seq. ; provided, however, that the arbitrators shall issue a joint, written decision which shall include a list of findings, with supporting evidentiary references, and reasons, upon which the arbitrators have relied in making their decision. The place of arbitration shall be Houston, Texas, unless otherwise agreed to by the Parties.

Exhibit "P" also provides:

Notwithstanding anything herein and regardless of any procedures or rules of International Institute for Conflict Prevention and Resolution ("CPR"), it is

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