Court Opinion

ID: 4453240
Source: CourtListenerOpinion
Date Created: 2019-11-06 07:09:58.59097+00
Date Added: 2024-06-11T13:33:34.526961
License: Public Domain

Opinion issued November 5, 2019

                                      In The

                                Court of Appeals
                                      For The

                            First District of Texas
                              ————————————
                                NO. 01-19-00413-CV
                             ———————————
                   REBELLION ENERGY II, LLC, Appellant
                                        V.
   LIBERTY RESOURCES POWDER RIVER OPERATING, LLC AND
  LIBERTY RESOURCES MANAGEMENT COMPANY, LLC, Appellees

                     On Appeal from the 270th District Court
                              Harris County, Texas
                        Trial Court Case No. 2019-16000

                           MEMORANDUM OPINION

      In this interlocutory appeal, appellant Rebellion Energy II, LLC, asserts that

the trial court erred in denying its motion to compel arbitration. Because the

parties’ dispute is not within the scope of their narrow arbitration provision, the

trial court did not err. We affirm.
                                  Background

      Rebellion sued Liberty Resources Powder River Operating, LLC (Liberty

Resources) and Liberty Resources Management Company, LLC (Liberty

Management) (collectively, Liberty) in Harris County district court, seeking to

compel arbitration and alternatively asserting claims for breach of contract and

declaratory judgment. Liberty counterclaimed, asserting claims for declaratory

judgment, breach of contract, and indemnity.

      Rebellion moved to compel arbitration, and Liberty moved for summary

judgment on its counterclaims. After a hearing in which the trial court denied the

motion to compel arbitration, Rebellion brought this interlocutory appeal. We

granted Rebellion’s request to stay the litigation during the pendency of this

appeal.

      The parties’ dispute arises out of a June 2018 Purchase and Sale Agreement

(PSA) in which Rebellion acquired from Liberty certain oil and gas assets in

Wyoming, with a defined purchase price of $106 million that was subject to

upward and downward adjustments based on several provisions in the PSA. The

sale closed on August 2, 2018, and Rebellion assumed all of Liberty’s obligations

under Liberty’s contracts relating to the assets, including a Gas Gathering and

Processing Agreement (GGPA) between Liberty and Thunder Creek Gas Services,

LLC that was assigned to Rebellion in the PSA.

                                        2
      Under the GGPA, Thunder Creek, a third-party midstream services company,

agreed to provide gathering and processing services in connection with the

production of natural gas assets owned by Liberty (the Producer). The GGPA

provided that, if Thunder Creek agreed to connect a new well to its gathering

system and the Producer decided not to drill the well to the target depth or did not

complete the well within 120 days of the notice, then the Producer would be

obligated to reimburse Thunder Creek for all costs incurred in constructing facilities

for that well.

      Rebellion alleges in its suit that, in 2017, Liberty provided Thunder Creek

with notice for two new wells named Habanero and Nine Mile. Rebellion contends

that Liberty later—but before execution of the PSA— made the decision not to

complete the Habanero and Nine Mile wells and that Thunder Creek invoiced

Liberty the amount of $749,064.82 for its work on those wells.

      Liberty, on the other hand, contends in its counterclaim that, while it did

provide Thunder Creek with notice for the two new wells in 2017, it notified

Thunder Creek in January 2018 that it was delaying completion of the wells.

Liberty then provided Thunder Creek with new notices of completion for the two

wells on June 19, 2018, and August 7, 2018, respectively. Liberty then alleges

that, after the PSA closed and Rebellion assumed the GGPA, Rebellion decided

not to complete the Habanero and Nine Mile wells and notified Thunder Creek of

                                          3
its decision and that, as a result, on August 15, 2018, Thunder Creek sent

Rebellion two invoices totaling $749,064.82 for the costs for the Habanero and

Nine Mile wells.

      When the PSA closed, Liberty and Rebellion jointly signed a Preliminary

Settlement Statement that identified adjustments to the purchase price in accordance

with Sections 3.3 and 3.4 of the PSA. On December 5, 2018, Liberty delivered a

Final Settlement Statement to Rebellion that identified final adjustments to the

purchase price in accordance with Sections 3.3 and 3.5 of the PSA. These

adjustments included certain downward adjustments that the parties had previously

agreed should be made to the purchase price under Section 3.3(b)(viii) of the PSA.

The Thunder Creek invoices were not included in either the jointly executed

Preliminary Settlement Statement or the Final Settlement Statement that Liberty

delivered to Rebellion.

      On December 14, 2018, Rebellion sent Liberty a dispute notice that

included the Thunder Creek invoices in Liberty’s Final Settlement Statement and

attached a copy of the invoices. Rebellion’s insertion of the Thunder Creek

invoices allocated the invoices to Liberty and resulted in a downward purchase-

price adjustment. Rebellion asserted that its inclusion of the Thunder Creek

invoices in its dispute notice was based on Section 3.3(b)(viii), which allows for a

                                         4
downward adjustment to the purchase price as “provided for elsewhere in this

Agreement or otherwise agreed upon by Sellers and Buyer.”

      After its invoices were not paid for several months, Thunder Creek sent

demands for payment to both Rebellion and Liberty of the outstanding invoices.

On February 11, 2019, Liberty sent Rebellion a written indemnification notice

explaining that Rebellion was required to pay the Thunder Creek invoices under

the PSA and that Liberty was entitled to indemnification under the PSA for

Rebellion’s failure to pay the Thunder Creek invoices. Rebellion refused to pay the

entire amount but eventually paid approximately 25% of the invoiced amounts.

      Rebellion responded to Liberty’s indemnification notice with a letter

invoking the accounting arbitration provision in Article III of the PSA. Liberty

replied to Rebellion that Article III’s accounting arbitration was not the

appropriate forum for their dispute.

      While the underlying dispute between the parties is, ultimately, which party

is liable for the Thunder Creek invoices under the PSA, the only issue before us is

whether the Thunder Creek invoices can be included in the PSA’s purchase-price

adjustment mechanism so that the Thunder Creek invoices dispute is subject to

Article III’s accounting arbitration provision.

                                          5
                                     Analysis

      We review a trial court’s order denying a motion to compel arbitration for

abuse of discretion, but whether the claims in dispute fall within the scope of a

valid arbitration agreement is a question of law that we review de novo. Henry v.

Cash Biz, LP, 551 S.W.3d 111, 115 (Tex. 2018).

      Rebellion asserts that, because the PSA involves interstate commerce and

the parties are from different states, the Federal Arbitration Act (FAA) applies.

See, e.g., In re Nexion Health at Humble, Inc., 173 S.W.3d 67, 69 (Tex. 2005).

Liberty does not contest the FAA’s application, and both sides rely on federal and

Texas case law, as do we.

      Federal and Texas law strongly favor arbitration of disputes. Prudential Sec.,

Inc. v. Marshall, 909 S.W.2d 896, 898 (Tex. 1995); see also IPFS Corp. v. Lopez,

No. 01-18-00145-CV, 2018 WL 6175119, at *2 (Tex. App.—Houston [1st Dist.]

Nov. 27, 2018, no pet.) (mem. op.) (“Under the FAA, we resolve any doubts about

whether claims fall within the scope of an arbitration agreement in favor of

arbitration.”). But the “policy of resolving doubts in favor of arbitration cannot

serve to stretch a contractual clause beyond the scope intended by the parties or

allow modification of the plain and unambiguous provisions of an agreement.”

Belmont Constructors, Inc. v. Lyondell Petrochemical Co., 896 S.W.2d 352, 356

(Tex. App.—Houston [1st Dist.] 1995, writ denied); see also Steelworkers v.

                                         6
Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960) (“[A]rbitration is a matter

of contract and a party cannot be required to submit to arbitration any dispute which

[the party] has not agreed so to submit.”). A party seeking to compel arbitration

under the FAA must establish that a valid arbitration agreement exists and that the

claims at issue fall within the agreement’s scope. IPFS Corp., 2018 WL 6175119,

at *2 (citing Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222, 227 (Tex.

2014)).

      Courts distinguish between “narrow” and “broad” arbitration clauses. See In

re Complaint of Hornbeck Offshore (1984) Corp., 981 F.2d 752, 754 (5th Cir.

1993); Trap Rock Indus. v. Local 825, Int’l Union of Operating Eng’rs, 982 F.2d
884, 888 n.5 (3d Cir. 1992); McDonnel Douglas Fin. Corp. v. Pa. Power & Light

Co., 858 F.2d 825, 832 (2d Cir. 1988). We must first determine if the scope of the

arbitration provision is broad or narrow. N. Am. Deer Registry, Inc. v. DNA Sols.,

Inc., No. 4:17-CV-00062, 2017 WL 2120015, at *4 (E.D. Tex. May 16, 2017)

(citing Jones v. Halliburton Co., 583 F.3d 228, 235 (5th Cir. 2009); and Pennzoil

Expl. & Prod. Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1067 (5th Cir. 1998)).

Broad arbitration provisions are generally those that apply to “any dispute” or “all

disputes” arising from an agreement. Hornbeck Offshore, 981 F.2d at 755. Narrow

arbitration provisions, on the other hand, “expressly limit the range of disputes to a

single category or function.” Trap Rock, 982 F.2d at 888 n.5. “[I]f the clause is

                                          7
narrow, the matter should not be referred to arbitration or the action stayed, unless

the court determines that the dispute falls within the clause.” Hornbeck Offshore,
981 F.2d at 755.

      We now return to the PSA. It is undisputed that the PSA does not contain a

broad arbitration clause. It does have, however, a jurisdiction-consent and forum-

selection clause. Section 15.15 provides that the parties “CONSENT TO THE

EXERCISE OF JURISDICTION IN PERSON BY THE FEDERAL AND STATE

COURTS OF HARRIS COUNTY, TEXAS, FOR ANY ACTION ARISING OUT

OF THIS AGREEMENT.”

      The arbitration clause relied on by Rebellion is within Article III of the

PSA, which is entitled “Purchase Price.” Article III sets the $106 million purchase

price for the transaction and then provides mechanisms for the upward and

downward purchase-price adjustments that may be listed in a settlement statement

or dispute notice. Section 3.3(a) provides that “[t]he Purchase Price shall be

adjusted upward by the following amounts” and specifically identifies the

categories of adjustments that may be made to adjust the purchase price upward.

Section 3.3(b) provides that “[t]he Purchase price shall be adjusted downward by

the following amounts” and specifically identifies the categories of adjustments

that may be made to adjust the purchase price downward. Section 3.3(b)(viii)

                                         8
allows for a downward adjustment as “provided for elsewhere in this Agreement or

otherwise agreed upon by Sellers and Buyer.”

      The mechanisms for effectuating adjustments to the purchase price were set

forth in Sections 3.4 and 3.5. Section 3.4 requires Liberty to provide a pre-closing

“preliminary settlement statement” that “shall set forth the Adjusted Purchase

Price, reflecting each adjustment made in accordance with this Agreement as of the

date of such Statement.” If Rebellion objects to the preliminary settlement

statement, it is required to deliver a written report containing all proposed changes.

The closing is then based on the Preliminary Settlement Statement as agreed by the

parties or, absent such agreement, the Preliminary Settlement Statement as

submitted by Liberty.

      Section 3.5 requires Liberty to provide, on or before 120 days after closing,

a Final Settlement Statement “based on actual income and expenses during the

period from and after the Effective Time until Closing and which takes into

account all final adjustments made to the purchase price.” Then, no later than thirty

days after receipt of the Final Settlement Statement, Rebellion must deliver a

written report (the Dispute Notice) containing any proposed changes to the Final

Settlement Statement and an explanation of such changes and the reasons therefor.

      Section 3.6 then sets forth the arbitration clause relied on by Rebellion. It

provides:

                                          9
             3.6 Disputes. If Sellers and Buyer are unable to resolve the
      matters addressed in the Dispute Notice, each of Buyer and Sellers
      shall within 14 Business Days after the delivery of such Dispute
      Notice, summarize its position with regard to such matters in the
      Dispute Notice in a written document of twenty pages or less and
      submit such summaries to the Denver office of Deloitte LLP or such
      other Person as the Parties may mutually select (subject to the last
      sentence in this Section 3.6, the “Accounting Arbitrator”), together
      with the Dispute Notice, the Final Settlement Statement and any other
      documentation such Party may desire to submit. Within 20 Business
      Days after receiving the Parties’ respective submissions, the
      Accounting Arbitrator shall render a decision choosing either Sellers’
      position or Buyer’s position with respect to each matter addressed in
      any Dispute Notice, based on the materials described above. Any
      decision rendered by the Accounting Arbitrator pursuant hereto shall
      be final, conclusive and binding on Sellers and Buyer and will be
      enforceable against any of the Parties in any court of competent
      jurisdiction. The costs of such Accounting Arbitrators shall be borne
      one-half by Buyer and one-half by Sellers. In the event that Deloitte
      LLP declines to serve as the Accounting Arbitrator and the Parties are
      unable to agree, within 5 Business Days of Deloitte LLP declining to
      so serve, upon another Person to serve as Accounting Arbitrator, then
      the Accounting Arbitrator shall be selected by lot from among the
      independent national accounting firms that have not represented any
      Party or its Affiliates at any time during the three year period of time
      immediately preceding its designation hereunder.

      As mentioned, Rebellion sent Liberty a Dispute Notice including the

Thunder Creek invoices in Liberty’s Final Settlement Statement. Rebellion

allocated the Thunder Creek invoices to Liberty, which resulted in a downward

purchase-price adjustment. Rebellion asserted that its inclusion of the Thunder

Creek invoices in its dispute notice was based on Section 3.3(b)(viii), which

allows for a downward adjustment to the purchase price as “provided for elsewhere

in this Agreement or otherwise agreed upon by Sellers and Buyer.” The precise
                                        10
issue, therefore, is whether, under the PSA, Rebellion could then include the

Thunder Creek invoices so that they were subject to Section 3.6’s narrow

accounting arbitration provision.

      Rebellion’s argument is that the plain language of the dispute resolution

provision of Section 3.6 covers “the matters addressed in the Dispute Notice” and

Rebellion’s Dispute Notice clearly and unambiguously included its contention that

the Thunder Creek invoices should be included in the Final Settlement Statement

as a downward purchase-price adjustment under Section 3.3(b), which lists, as a

category of costs subject to downward adjustment, “any other amount provided for

elsewhere in this Agreement.” Rebellion asserts that the purchase-price adjustment

is proper under Section 3.3(b)(viii) on the basis of Section 2.3(a), regarding

Property Expenses, and/or Sections 8.2 and 8.3(d), governing Specified

Obligations. Therefore, according to Rebellion, on its face, the arbitration

provision covers the dispute in question.

      To determine whether a particular dispute falls within the scope of a narrow

and specific arbitration clause, we must consider the context in which the language

appears. Baudoin v. Mid-Louisiana Anesthesia Consultants, Inc., 306 F. App’x

188, 192 (5th Cir. 2009) (finding “district court erred by looking at the language in

the arbitration clause in isolation, without considering the context under which that

language appears”). We also must “examine and consider the entire writing in an

                                            11
effort to harmonize and give effect to all the provisions of the contract so that none

will be rendered meaningless.” J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223,

229 (Tex. 2003). “When determining whether claims fall within the scope of the

arbitration agreement, we look to the factual allegations, not the legal claims.”

IPFS Corp., 2018 WL 6175119, at *2 (quoting Rachal v. Reitz, 403 S.W.3d 840,

850 (Tex. 2013)).

      We first look to the allegations in Rebellion’s suit. Rebellion’s petition

alleges that the amount in dispute is owed by Liberty under Section 2.3(a) of the

PSA regarding “Property Expenses” and under Article VIII regarding “Specified

Obligations.” Neither of these PSA sections allow for purchase-price adjustments

under Article III. Likewise, Liberty’s counterclaims have no relationship to Article

III purchase-price adjustments. Instead, they are based upon the “Assumed

Obligations” and “Indemnification” provisions of Article VIII.

      We agree with Liberty that Article VIII of the PSA—not Article III—

governs disputes over third-party payments and therefore governs the disputes in

this case. The Thunder Creek invoices were sent to Rebellion under the GGPA,

which is defined as an Applicable Contract in the PSA. Section 8.1(b) governs all

“obligations and liabilities relating in any manner to the Applicable Contracts”

regardless of when such obligations or liabilities arose. And Section 8.1(e) governs

“Third Party Claims consisting of unpaid Property Expenses.”

                                         12
      The “Specified Obligations” provision in the PSA that Rebellion’s petition

references, is also found in Article VIII (Section 8.2) and references “Third Party

claims consisting of unpaid Property Expenses attributable to periods prior to the

Effective Time.” Also, Section 8.3(d), which Rebellion’s brief references, is

governed by Article VIII and expressly makes any claims “arising from, based

upon, related to, or associated with” “any of the Specified Obligations” subject to

indemnification.

      Additionally, Liberty’s indemnification claim for Rebellion’s failure to pay

the Thunder Creek invoices is governed by Article VIII, Section 8.4. Article VIII

expressly includes “Third Party claims consisting of unpaid Property Expenses” as

being subject to indemnification. These claims do not implicate the purchase-price

adjustments in Section 3.3 of Article III.

      For its contention that this dispute falls within the accounting arbitration

clause because Rebellion’s Dispute Notice indicated the Thunder Creek invoices

should be downward purchase-price adjustments under Section 3.3(b), Rebellion

solely relies on Section 3.3(b)(viii), which allows downward purchase price

adjustments for “any other amount provided for elsewhere in this Agreement or

otherwise agreed upon by Sellers and Buyer.” According to Rebellion, “the

purchase price adjustment [for the Thunder Creek invoices] is proper under this

‘provided for elsewhere in this Agreement’ category on the basis of Section 2.3(a),

                                             13
regarding Property Expenses, and/or Section 8.2 and 8.3(d), governing Specified

Obligations.” But as Liberty points out, Sections 2.3, 8.2, and 8.3 do not have

arbitration clauses or refer to Section 3.6’s accounting arbitration clause.

      Therefore, considering all of the PSA provisions, it is evident the parties did

not intend to include disputes arising under “Section 2.3(a), regarding Property

Expenses, and/or Section 8.2 and 8.3(d), governing Specified Obligations” (or

disputes regarding Assumed Obligations or indemnification under Article VIII)

within the “other amount provided for elsewhere in this Agreement” purchase-

price adjustment category.

      Section 3.3(b)(viii) provides that this adjustment category only applies to

specified “amounts” that the parties expressly agreed in the PSA to include as an

adjustment in the Settlement Statement. Liberty explains, for example, that Section

13.3(b) expressly provides that Casualty Loss amounts shall be paid “by

adjustment in the Preliminary Settlement Statement, an amount equal to the actual

amount of such Casualty Loss.” Section 13.4(b) similarly references adjustments to

the purchase price for assets excluded because of a failure to obtain assignment

consents and explains “the Purchase Price shall be reduced by the Allocated Value

of the Assets so excluded . . . as such amount is appropriately adjusted in

accordance to Section 3.3.” We agree that these provisions demonstrate the parties’

intent to include adjustments for amounts for Casualty Loss and Assignment

                                          14
Consents within the category of amounts “otherwise provided in the Agreement.”

These provisions also demonstrate the parties’ ability to otherwise provide for

adjustments for other amounts in the Agreement.

      The words “or otherwise agreed upon by Sellers and Buyer” in Section

3.3(b)(viii) emphasize that any adjustment amount in this category that is not

expressly provided in the PSA must be “agreed upon” by the parties. This

emphasis on agreement harmonizes with the language in Section 2.3(b) that

indicates that Property Expense amounts that are paid before delivery of the Final

Settlement Statement shall be accounted for in the Final Settlement Statement, but

unpaid invoices “owed by the other Party” are not included in the Final Settlement

Statement unless they are “agreed to, or deemed agreed to, by the Parties.”

Correspondingly, Section 3.3(a)(ii) indicates that Property Expenses paid by

Liberty shall be included as upward purchase-price adjustments, but Section 3.3(b)

does not include unpaid Property Expenses as downward purchase-price

adjustments unless they are agreed to by the parties.

      If the parties had intended to allow downward purchase-price adjustments

for unpaid Property Expenses under Section 2.3 or for Specified Obligations under

Article VIII, they could have expressly provided for that in Section 3.3 like they

had done in Section 3.3(a)(ii) for upward purchase-price adjustments. The parties

instead made such claims subject to indemnification under Article VIII. Nothing in

                                         15
Section 3.3 or elsewhere in the PSA suggests that unpaid Property Expenses,

Assumed Obligations, Specified Obligations, or indemnification may be used to

adjust the purchase price, unless such adjustment is agreed to.

      Rebellion’s claim that any dispute arising under the PSA may be forced

before an accounting arbitrator simply by Rebellion’s inclusion of it in a Dispute

Notice would produce absurd results and force an accounting arbitrator to

determine complex legal disputes never intended for an accountant to decide.

Liberty points out, for example, that the term “Specified Obligations” not only

includes disputes about “unpaid Property Expenses,” but also includes disputes

about “offsite Third-Party disposal of Hazardous Substances” and alleged “gross

negligence or willful misconduct [of Liberty].” Nothing in Article VIII or

elsewhere in the PSA suggests that the parties intended an accounting arbitrator to

decide such disputes. Rebellion’s interpretation would also improperly render

meaningless the parties’ agreement in Section 15.15 to resolve contractual disputes

in court. See J.M. Davidson, Inc., 128 S.W.3d at 229 (stating that courts must

“examine and consider the entire writing in an effort to harmonize and give effect

to all provisions so that none are rendered meaningless”).

      Last, we disagree with Rebellion’s apparent suggestion that an accounting

arbitrator would have the authority to decide whether the dispute over the Thunder

Creek invoices falls within the scope of Article III and therefore determine whether

                                         16
the dispute is arbitrable. “[A]bsent unmistakable evidence that the parties intended

the contrary, it is the courts rather than arbitrators that must decide ‘gateway

matters’” of arbitrability. In re Weekley Homes, LP, 180 S.W.3d 127, 130 (Tex.

2005); Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (“[A]

gateway dispute about whether the parties are bound by a given arbitration clause

raises a ‘question of arbitrability’ for a court to decide.”). Furthermore, nothing in

the PSA delegates any authority for an accounting arbitrator to decide gateway

issues of arbitrability.

                                    Conclusion

       The trial court correctly concluded that this dispute falls outside the narrow

accounting arbitration clause. We affirm the trial court’s order and lift our stay of

the litigation.

                                              Richard Hightower
                                              Justice

Panel consists of Justices Kelly, Hightower, and Countiss.

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