Court Opinion

ID: 3110817
Source: CourtListenerOpinion
Date Created: 2015-10-16 06:48:21.564181+00
Date Added: 2024-06-11T11:52:19.312702
License: Public Domain

NO. 07-10-0442-CV

                                       IN THE COURT OF APPEALS

                                  FOR THE SEVENTH DISTRICT OF TEXAS

                                             AT AMARILLO

                                               PANEL D

                                            MARCH 7, 2011
                                    _____________________________

                                   KURT TORSTER and GEA GROUP, AG,
                                                 Appellants
                                                  v.

                              PANDA ENERGY MANAGEMENT, LP, PLC II, LLC,
                                and PANDA ENERGY INTERNATIONAL, INC.,

                                                   Appellees
                                    _____________________________

                         FROM THE 222nd DISTRICT COURT OF DEAF SMITH COUNTY;

                           NO. CI-08J-085; HONORABLE ROLAND SAUL, PRESIDING
                                    _____________________________

                                          Memorandum Opinion
                                    _____________________________

Before QUINN, C.J., and CAMPBELL and PIRTLE, JJ.
      What we have here is an interlocutory appeal from an order denying the motion of  Kurt  Torster
and GEA Group, AG requesting that the cause be arbitrated per the Federal  Arbitration  Act,  i.e.  9
U.S.C. §§1-16. The dispute between the  parties  has  travelled  a  rather  long  and  winding  road.
Originally initiated in state court,  it  sojourned  through  federal  territories  via  removal  and
bankruptcy statutes.  Ultimately, the United States District  Court  for  the  Northern  District  of
Texas, Amarillo Division, sent it home to Deaf Smith County.  In  doing  so,  that  court  thoroughly
discussed the nature of the controversy and lawsuit in its order  remanding  the  cause.   See  Panda
Energy Mgt., L.P., et al v. GEA Group, A.G., et al, No. 2:08-CV-208-J  (N.D.  Tex.  April  12,  2010)
(Order Granting Plaintiffs’ Motion to Remand).  We thank the court for doing so and liberally  borrow
for use here many of its words.  But, before continuing, we  inform  the  litigants  that  the  trial
court’s decision to forego arbitration is affirmed.
      Background
      Kurt Torster is a resident of Houston.  Panda Energy Management, LP, PLC  II,  LLP,  and  Panda
Energy International, Inc. (collectively referred to as Panda  Energy  or  Panda)  sued  Torster  for
fraud and negligent misrepresentation relating to representations he made during March of  2005,  and
before July 13, 2005, directly to Panda Energy.  The latter alleged  that  they  were  investors  who
relied on Torster’s representations in deciding to invest millions in a proposed  ethanol  conversion
project in Hereford, Texas, and in three or four other projects  that  Panda  Energy  was  trying  to
develop.
      Torster was CEO of non-party Lurgi PSI, Inc. at the time the representations were made.   Panda
Energy alleged that his representations were made falsely and for the purpose of recklessly  building
up a list of  valuable  business  contracts  which  were  “booked”  (recorded  on  company  books  as
profitable executed contracts).  They also alleged the existence of a fraudulent  scheme  where  more
projects were booked than could be timely begun or successfully  completed  by  Torster  or  GEA,  or
GEA’s wholly owned subsidiary, Lurgi PSI, Inc.  Panda Energy also alleged that  the  scheme  or  plan
was to book as many contracts on Lurgi’s books as possible, and for Lurgi to  then  be  sold  off  to
inexperienced buyers for the immediate realization of profit to Torster  and  GEA.   Furthermore,  at
the time Torster’s representations were made, GEA had existing, but undisclosed, plans to  reorganize
and divest Lurgi’s less profitable lines of work, that is, the booked  ethanol  conversion  projects,
according to Panda.
      As part of the inducement to invest in  and  eventually  execute  the  engineering  design  and
construction contracts, GEA issued a guaranty of performance for Lurgi’s performance on the  Hereford
plant contract.  It was also said that by the time the guaranty was  called  upon,  GEA  had  already
sold its European and U.S. construction subsidiaries to buyers  who  were  not  experienced  in  such
projects.  GEA allegedly  knew  that  it  would  have  to  rely  entirely  on  the  promises  of  the
inexperienced buyers to complete the projects and backstop GEA’s guarantee, but accepted that  future
risk to realize immediate profits.  When GEA refused to honor its guaranty, the  Hereford  plant  was
one project that suffered construction delays, cost overruns  and  other  problems,  was  a  loss  to
investors, and was ultimately not completed causing millions of dollars in losses to Panda for  which
losses Torster and GEA were liable.
      It was further alleged by Panda that, as a result of the  scheme,  Lurgi  PSI,  Inc.,  and  its
successor in interest, failed to construct over eight ethanol plants,  including  the  one  at  issue
here.  The fraud purportedly worked because GEA booked a contract once it came to  financial  closure
without regard to contingencies that would arise in the contract’s  performance.   Torster  was  also
“handsomely rewarded with a bonus that depended only on financial  closure,”  that  is,  the  project
being booked for a paper profit upon execution  of  the  contract,  and  that  “failure  to  actually
construct  was  of  no  moment  to”  Torster  or  GEA.   Additionally,  Torster  made   the   alleged
misrepresentations because of bonuses he  realized;  so,  he  had  a  personal  financial  motive  or
incentive to book the executed contracts and receive his portion of the scheme’s reward.
      Panda Energy also alleged that GEA and Torster promoted ethanol conversion plants  directly  to
it with assurance of GEA’s and Lurgi’s competence to  engineer  and  build  the  plants  and  thereby
induced the investors to form  and  fund  a  project  company  (PHE)  that  would  secure  additional
financing to hire Lurgi.  But for the fraud committed,  says  Panda,  the  latter  would  never  have
entered the ethanol business with Lurgi.
      As for the matter of arbitration, that topic arose from a clause in the  construction  contract
executed between PHE and Lurgi.[1]  That none of the litigants to this  proceeding  were  signatories
to the PHE/Lurgi agreement is undisputed.  Nonetheless, Torster  and  GEA  contend  that  the  clause
encompassed the controversy before us  because  the  dispute  related  to  the  construction  of  the
Hereford ethanol plant.
      Authorities and Their Application
      Whether the trial court erred in refusing to order Panda, Torster, and GEA to  arbitration  per
the Federal Arbitration Act depends on whether it abused its discretion.  Sidley,  Austin,  Brown,  &
Wood, L.L.P. v. J.A. Green Dev. Corp., 327 S.W.3d 859, 863 (Tex. App.–Dallas 2010, no pet.)  (stating
that “we have not addressed the standard of review applicable to  such  appeals  [under  the  Federal
Arbitration Act]. However, on appeals of orders denying arbitration under the Texas  Arbitration  Act
(TAA), we apply a no-evidence standard to the trial court's factual  determinations  and  a  de  novo
standard to legal determination . . . .  This standard  is  the  same  as  the  abuse  of  discretion
standard of review and we will apply that standard of review to interlocutory appeals  under  section
51.016”).  Moreover, a trial court abuses its discretion when  its  decision  deviates  from  guiding
rules and principles and  is  otherwise  arbitrary,  capricious  and  unreasonable.   See  Downer  v.
Aquamarine Operators, Inc., 701 S.W.2d 238, 241-42 (Tex. 1985).
      In a nutshell, we are being asked to decide if it  was  wrong  to  forego  the  arbitration  of
claims and causes of action arising from conduct occurring prior to the execution and independent  of
the PHE/Lurgi contract and between parties who  never  signed  that  document.   Those  circumstances
liken to the situation described in the very recent opinion of the Fifth Court of Appeals  in  Weaver
& Tidwell, LLP. v. The Guar. Co. of N. Am. USA, No. 05-10-0557-CV, 2011 Tex. App.  Lexis  1285  (Tex.
App.–Dallas, February 23, 2011, no pet. h.).  There, the  trial  court  also  refused  to  order  the
parties to arbitration.   Weaver and Tidwell  thought  that  was  error  because  they  had  executed
various contracts with another  company,  J&V,  to  perform  audits  of  J&V,  and  those  agreements
contained arbitration clauses.  The audits were required by the Texas  Department  of  Transportation
as a condition of contracting with the department to  install  lighting  and  signal  systems.   Also
required by the department were performance bonds which bonds were  provided  by  The  Guarantee  Co.
And, in deciding to provide those bonds, The Guarantee Co. reviewed and relied  upon  the  audits  of
J&V completed by Weaver & Tidwell.  Needless to  say,  J&V  defaulted  on  its  agreements  with  the
department, which defaults triggered The Guarantee Co.’s duty to  perform.     Thereafter,  J&V  sued
Weaver & Tidwell, alleging various causes of action sounding in fraud, breached fiduciary  duty,  and
negligence.  That suit was sent to arbitration per the contracts between  the  two  entities.   In  a
separate proceeding, The Guarantee Co. sued Weaver & Tidwell for negligently  performing  the  audits
it relied on and for providing false information about J&V in those audits.  Though Weaver &  Tidwell
asked the trial court to also forward the Guarantee Co. suit  to  arbitration,  the  court  did  not.
That decision was upheld on appeal.
      In ruling as it did, the reviewing court in Weaver &  Tidwell  considered  the  nature  of  the
cause of action being pursued, whether The Guarantee Co. was attempting to enforce rights arising  or
acquire a benefit under the Weaver/J&V auditing contract (as a subrogee or third-party  beneficiary),
and whether The Guarantee Co. was a signatory to the Weaver/J&V  auditing  agreements.   Because  The
Guarantee Co. did not sign the auditing agreements, was not seeking to obtain a benefit arising  from
those agreements as either a subrogee or third-party beneficiary, and was pursuing a  tort  claim  as
opposed to one for breach of the Weaver/J&V contracts, it was not bound by  the  arbitration  clauses
at issue, according to the court.  Id. at *4-6.  The same is no less true here.
      Panda Energy did not sign the PHE/Lurgi contract (i.e. the accord  containing  the  arbitration
clause).  Nor is it pursuing (as a subrogee, third-party beneficiary, or in any other  capacity)  any
entitlement or right arising from the contract or even prosecuting a  cause  of  action  sounding  in
breached contract.  Rather, the events underlying its claim arose  prior  to  the  execution  of  the
PHE/Lurgi document and involved  purported  misrepresentations  uttered  and  deceptions  planned  by
Torster and GEA  independent  of  that  agreement.   To  hold  under  those  circumstances  that  the
independent tort claim urged by Panda Energy is somehow encompassed by an arbitration  clause  in  an
agreement none of the parties at bar signed would be to ignore the well-reasoned opinion  and  ruling
of the Fifth Court in Weaver & Tidwell and the authorities cited therein.  That we  opt  not  to  do.
Accordingly, we 1) conclude that the trial court did not abuse its discretion by refusing  to  direct
the litigants to arbitration, 2) overrule all issues of Torster and GEA,  and  3)  affirm  the  trial
court’s order.

                                        Brian Quinn
                                        Chief Justice

-----------------------
      [1]The clause read as follows:  “. . . any Dispute shall be settled exclusively and finally  by
binding arbitration . . . .”  Moreover, the term “dispute” was defined as “any  dispute,  controversy
or claim between the Parties [to the contract] arising out of or relating to this Agreement,  or  the
breach, termination or invalidity thereof . . . .”