No. 05-10-00516-CV

In the Fifth Court of Appeals

Dallas, Texas

PONDEROSA PINE ENERGY, LLC, Plaintiff-Appellant,

v.

TENASKA ENERGY, INC.; TENASKA ENERGY HOLDINGS, LLC; TENASKA CLEBURNE, LLC; CONTINENTAL ENERGY SERVICES, INC.;

AND ILLINOVA GENERATING CO., Defendants-Appellees.

On Appeal from the 191st District Court of Dallas County, Texas (Cause No. 07-04189)

REPLY BRIEF OF APPELLANT PONDEROSA PINE ENERGY, LLC

Frank H. Penski Constance M. Boland Abigail T. Reardon NIXON PEABODY, LLP 437 Madison Avenue New York, New York 10022 [Tel.] (212) 940-3000 [Fax] (212) 940-3111 (additional counsel on inside cover)

Edward C. Dawson State Bar No. 24031999 Marc S. Tabolsky State Bar No. 24037576 Ryan P. Bates State Bar No. 24055152 Scott A. Keller State Bar No. 24062822 YETTER COLEMAN LLP 221 West Sixth Street, Suite 750 Austin, Texas 78701 [Tel.] (512) 533-0150 [Fax] (512) 533-0120

Attorneys for Appellant Ponderosa Pine Energy, LLC

ORAL ARGUMENT REQUESTED

Michael W. Huddleston State Bar No. 10148415 B. Frank Cain State Bar No. 03607500 SHANNON, GRACEY, RATLIFF & MILLER, L.L.P. 777 Main Street, Suite 3800 Fort Worth, Texas 76102 [Tel.] (817) 882-7614 [Fax] (817) 336-3735

i

TABLE OF CONTENTS

Page

Index of Authorities ............................................................................................................ ii

Argument ............................................................................................................................ 1

I. Defendants Waived Their Evident-Partiality Challenge ......................................... 2

A. Defendants Expressly Waived Any Evident-Partiality Challenge ............... 2

B. Defendants Also Waived the Challenge Because They Did Not Timely Raise It Despite Knowing the Underlying Facts ............................. 7

II. The Evident-Partiality Challenge Fails as a Matter of Law .................................. 15

A. The Evident-Partiality Standard Requires Sufficient Disclosure of Relationships, Not Disclosure of All Details ............................................. 16

B. Stern’s Disclosures Were More Than Sufficient to Defeat Defendants’ Evident-Partiality Challenge .................................................. 17

Conclusion and Prayer ...................................................................................................... 24

Certificate of Service ........................................................................................................ 26

ii

INDEX OF AUTHORITIES

CASES Page(s)

Alim v. KBR (Kellogg, Brown & Root)-Halliburton, 331 S.W.3d 178 (Tex. App.—Dallas 2011, no pet. h.) .............................. 13, 14, 18, 23

ALS & Assocs. v. AGM Marine Constructors, Inc., 557 F.Supp.2d 180 (D. Mass. 2008) ............................................................................ 21

Burlington N. R.R. Co. v. TUCO Inc., 960 S.W.2d 629 (Tex. 1997) .................................................................................. 11, 24

Canajoharie Cent. Sch. Dist. v. Canajoharie United Sch. Emps., 485 N.Y.S.2d 866 (N.Y. App. Div. 1985) ................................................................... 12

Casden Park La Brea Retail LLC v. Ross Dress For Less, Inc., 75 Cal.Rptr.3d 763 (Cal. Ct. App. 2008) ..................................................................... 19

Champlin Oil & Ref. Co. v. Chastain, 403 S.W.2d 376 (Tex. 1966) .......................................................................................... 8

Commonwealth Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145 (1968) ..................................................................................................... 22

Daiichi Hawai’i Real Estate Corp. v. Lichter, 82 P.3d 411 (Haw. 2003) ......................................................................................... 7, 12

Dallas Area Rapid Transit v. Dallas Morning News, 4 S.W.3d 469 (Tex. App.—Dallas 1999, orig. proceeding) .................................. 5, 6, 7

Dean v. Sullivan, 118 F.3d 1170 (7th Cir. 1997) ..................................................................................... 15

Dornbirer v. Kaiser Found. Health Plan, 83 Cal.Rptr.3d 116 (Cal. Ct. App. 2008) ....................................................................... 7

Fid. Fed. Bank, FSB v. Durga Ma Corp., 386 F.3d 1306 (9th Cir. 2004) ....................................................................................... 7

Fininen v. Barlow, 47 Cal.Rptr.3d 687 (Cal. Ct. App. 2006) ....................................................................... 6

Fort Hill Builders v. Nat’l Grange Mut. Ins. Co., 866 F.2d 11 (1st Cir. 1989) .......................................................................................... 15

iii

Henry v. Halliburton Energy Servs., 100 S.W.3d 505 (Tex. App.—Dallas 2003, pet. denied) ............................................. 16

Houston Village Builders, Inc. v. Falbaum, 105 S.W.3d 28 (Tex. App.—Houston [14th Dist.] 2003, pet. denied) ........................ 23

Hunt v. Mobil Oil Corp., 654 F.Supp. 1487 (S.D.N.Y. 1987) ........................................................................ 19, 24

In re Chestnut Energy Partners, Inc., 300 S.W.3d 386 (Tex. App.—Dallas 2009, orig. proceeding) .................................... 15

In re Olshan Found. Repair Co., 328 S.W.3d 883 (Tex. 2010) .................................................................................. 14, 15

Int’l Bank of Commerce-Brownsville v. Int’l Energy Dev. Corp., 981 S.W.2d 38 (Tex. App.—Corpus Christi 1998, pet. denied) .................................. 15

J.P. Stevens & Co. v. Rytex Corp., 312 N.E.2d 466 (N.Y. 1974) .......................................................................................... 7

Johnson v. Korn, 117 S.W.2d 514 (Tex. Civ. App.—El Paso 1938, writ ref’d) ................................ 7, 8, 9

Jones v. Fuller, 856 S.W.2d 597 (Tex. App.—Waco 1993, writ denied) ............................................... 8

Kendall Builders Inc. v. Chesson, 149 S.W.3d 796 (Tex. App.—Austin 2004, pet. denied) ..................................... passim

Kiernan v. Piper Jaffray Cos., 137 F.3d 588 (8th Cir. 1998) ......................................................................................... 7

Lagstein v. Certain Underwriters at Lloyd’s, London, 607 F.3d 634 (9th Cir. 2010) ....................................................................................... 11

Las Palmas Med. Ctr. v. Moore, __ S.W.3d __, 2010 WL 3896501 (Tex. App.—El Paso Oct. 6, 2010, pet. denied) .............................................. 16, 18, 21

Lifecare Int’l v. CD Med., 68 F.3d 429 (11th Cir. 1995) ....................................................................................... 21

Lummus Global Amazonas v. Aguaytia Energy del Peru S.R. Ltda., 256 F.Supp.2d 594 (S.D. Tex. 2002) ........................................................................... 12

iv

Mantle v. Upper Deck Co., 956 F.Supp. 719 (N.D. Tex. 1997) .............................................................................. 15

Mariner Fin. Group, Inc. v. Bossley, 79 S.W.3d 30 (Tex. 2002) ............................................................................................ 19

Montez v. Prudential Sec., 260 F.3d 980 (8th Cir. 2001) ....................................................................................... 21

Moran v. Alder, 570 S.W.2d 883 (Tex. 1978) ................................................................................ 8, 9, 11

Nat’l Med. Enters., Inc. v. Godbey, 924 S.W.2d 123 (Tex. 1996). ....................................................................................... 21

Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621 (6th Cir. 2002) ....................................................................................... 20

Pardee v. Universal Life Ins. Co., 170 S.W.2d 852 (Tex. Civ. App.—Waco 1943, no writ) .............................................. 7

Positive Software Solutions v. New Century Mortg. Corp., 476 F.3d 278 (5th Cir. 2007) (en banc) ........................................................... 14, 18, 24

Power Servs. Assocs. v. UNC Metcalf Servicing, 338 F.Supp.2d 1375 (N.D. Ga. 2004) .............................................................. 12, 14, 18

Pratt-Shaw v. Pilgrim’s Pride Corp., 122 S.W.3d 825 (Tex. App.—Dallas 2003, pet. denied) ............................................... 5

Prudential Sec., Inc. v. Marshall, 909 S.W.2d 896 (Tex. 1995). ....................................................................................... 24

Slater v. Nat’l Med. Enters., 962 S.W.2d 228 (Tex. App.—Fort Worth 1998, pet. denied) ....................................... 8

Theis Res., Inc. v. Brown & Bain, 400 F.3d 659 (9th Cir. 2005) ............................................................................... 5, 6, 11

Thomas James Assocs., Inc. v. Owens, 1 S.W.3d 315 (Tex. App.—Dallas 1999, no pet.). ........................................... 15, 16, 18

Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), 631 F.3d 869 (7th Cir. 2011). ...................................................................................... 22

v

Vigorito v. UBS PaineWebber, 557 F.Supp.2d 303 (D. Conn. 2008) ............................................................................ 12

Voskamp v. Arnoldy, 749 S.W.2d 113 (Tex. App.—Houston [1st Dist.] 1987, writ denied) .......................... 7

Yancy v. United Surgical Partners Int’l, Inc., 236 S.W.3d 778 (Tex. 2007) .......................................................................................... 7

RULES

AAA Rule R-16(a) ............................................................................................................. 16

OTHER AUTHORITIES

Eric G. Orlinsky, Corporate Opportunity Doctrine and Interested Director Transactions, 24 DEL. J. CORP. L. 451 (1999). ............................................................ 19

Leigh Jones, Arbitration Challenges on the Rise, Nat’l L.J., Feb. 14, 2011 ....................... 4

1

ARGUMENT

Four months before the parties agreed to an express waiver of conflicts

memorialized in the arbitration panel’s scheduling order, and nine months before the

arbitral hearing on the merits, defendants knew that Stern was an advisor and director of

Lexsite. They knew that Lexsite had solicited business from Nixon Peabody and that

Stern had been involved in that solicitation. They knew that Nixon Peabody had

appointed Stern as an arbitrator in three other arbitrations. But they never objected to

Stern serving as an arbitrator. They did not even ask him for further information about

Lexsite or about the other arbitrations involving Nixon Peabody. Instead, after

defendants lost at arbitration they—for the first time—began raising complaints based on

relationships that Stern had disclosed months earlier.

Defendants untimely challenge to Stern based on evident partiality was waived

both by the express waiver in the scheduling order, and by their failure to timely raise this

argument before the arbitrators. The district court erroneously accepted defendants’

argument that they “could not waive what they did not know.” That premise is incorrect

as a matter of law because while a party cannot waive rights it does not know about, the

defendants knew about their right to object to Stern or require further disclosures but

chose not to take action. Defendants opted not to do more even though Stern had already

disclosed the relationships about which they now complain, and defendants were well

aware of their right to request a more detailed disclosure on those relationships, to allow

defendants to make an informed decision whether to object to Stern before the arbitration

proceeded on the merits.

2

Defendants’ evident-partiality challenge also fails on the merits. Months before

any arbitral proceedings on the merits, Stern explained his relationships in enough detail

for defendants to assess his potential partiality and decide whether they needed more

information. He did not merely say he had “come across” Nixon Peabody or Lexsite.

Nor did he give false information; his disclosures gave certain details and left others out,

as any nonexhaustive disclosure must. The omitted details range from cumulative facts,

to things Stern himself did not know, to things defendants already knew or at least knew

enough about—based on Stern’s disclosures—to reasonably prompt an inquiry. None of

these omitted details, separately or together, would have changed an objective observer’s

impression of Stern’s impartiality.

I. DEFENDANTS WAIVED THEIR EVIDENT-PARTIALITY CHALLENGE.

At the beginning of the arbitration proceeding, Ponderosa, Tenaska, Continental,

and Illinova each “confirm[ed]” to the arbitration panel that it “knowingly waived any

and all conflicts of interest and/or potential conflicts of interest,” without conditions. PX

7 at 9. Defendants did not have to agree to expressly waive conflicts. But having done

so, they cannot nullify their express waiver simply because they lost. Moreover, even if

there were no express waiver by the defendants, they nevertheless waived their evident-

partiality challenge by not raising Stern’s alleged evident partiality either before or during

arbitration when they had actual or constructive knowledge of the relevant facts.

A. Defendants Expressly Waived Any Evident-Partiality Challenge.

During a lengthy disclosure process, that began in June 2006 and ended with the

October 2006 scheduling order, Justice Baker and Stern made disclosures to defendants,

3

and made supplemental disclosures in response to defendants’ multiple requests for

additional details. DX 16, 18, 279; PX 65, 115, 137, 156. In particular, Stern disclosed

all of the relationships underlying defendants’ evident-partiality challenge, including that:

he was a director of Lexsite, PX 65,1

he participated, on behalf of Lexsite, in a discussion at a Nixon Peabody office regarding the possibility of Nixon Peabody outsourcing to Lexsite certain discovery tasks in litigation, DX 16,

he had been appointed an arbitrator by a party represented by Nixon Peabody, on the firm’s recommendation, in three other arbitrations, id., and

Ada Cogeneration had appointed him as an arbitrator in its arbitration with Amway “on the recommendation of Nixon-Peabody,” id.

Completely aware of Stern’s disclosed connections to Nixon Peabody and Lexsite,

defendants had the full opportunity to ask Stern for additional information about these

relationships—such as the Nixon Peabody attorneys who contacted him or Stern’s

financial stake in Lexsite. Instead, defendants opted not to stating that Stern’s disclosure

“reveals his prior and current contacts with Nixon Peabody,” and requested additional

information only about Stern’s “contacts or relationships with any of the parties or their

representatives (except your firm)”—“including in particular the bank entities that now

own [Ponderosa].” PX 115. Stern responded by supplementing his disclosure the next

day. DX 18.

1 Stern disclosed that he was a director of Lexsite in his CV that defendants received in June 2006, which defendants admit that they relied on. 5 RR 223-25. Defendants barely acknowledge this (erroneous) disclosure, suggesting Stern “identified his ‘relationship’ with the Lexsite company as being simply a member of the ‘Advisory Board.’” Aple Br. 33. After this suit was filed, Stern testified that his CV contained an error: he had never been a director of Lexsite but had served on its Advisory Board. DX 299 at 88-89, 96. Before and during the arbitration, though, an objective party in defendants’ position would have believed that Stern was a director of Lexsite. Although Stern was incorrect, he stated he was a Lexsite director and defendants knew he claimed to have that role and were on notice that his involvement with Lexsite might be extensive. See Aplt. Br. 40 & n.12.

4

At the conclusion of the disclosure process, Justice Baker insisted on an express

conflicts waiver from each party. PX 137, DX 275. Specifically, Justice Baker told the

party-appointed arbitrators: “I would appreciate it if you would explore further on getting

waivers by both sets of parties so that we can proceed expeditiously with our

responsibilities.” DX 275 at 2. The next day, Justice Baker provided additional

disclosures requested by defendants, DX 215, and he reiterated that the parties should get

“the waivers agreed upon” after they “get all the questions answered.” Id. Justice Baker

requested this express waiver from all parties as a capstone on the parties’ disclosure

process to forestall just this type of challenge, which is a predictable tactic commonly

employed by a losing party as a last-ditch effort to vacate an arbitral award based on

alleged arbitrator partiality or bias.2

That waiver was set forth in the pretrial order from the panel, PX 7, which had

been drafted by the parties, PX 20, and in which each party confirmed (1) that each

arbitrator had made a legally sufficient disclosure and (2) that the party knowingly

waived all conflicts:

25. Waiver of Conflicts: [Ponderosa], Tenaska, Illinova, [Continental] and each member of the Panel in this Arbitration hereby confirm that, as of the date below, they have each: (i) fully disclosed all conflicts of interest and potential conflicts of interest with respect to the designation of the members of the Panel in this Arbitration; and (ii) knowingly waived any and all conflicts of interest and/or potential conflicts of interest relating to the designation of the members of the Panel in this Arbitration.

2 As a partner at the law firm representing Illinova recently recognized, “[i]t’s becoming common for parties to lie in wait to see which side wins and for the loser to file a motion to vacate.” Leigh Jones, Arbitration Challenges on the Rise, Nat’l L.J., Feb. 14, 2011, at 4 (quoting a Locke Lord partner).

5

PX 7 at 9. If defendants wanted more information about Stern’s disclosed relationships

with Nixon Peabody and Lexsite, all they had to do was ask. Instead, the parties

represented that they had no other questions, and expressly waived all conflicts.

The express waiver’s clause (ii) waives “any and all conflicts of interest and/or

potential conflicts of interest.” Id. The waiver in clause (ii) was neither expressly nor

implicitly conditioned on clause (i), which simply recites the scope of the disclosures

made by the parties, their counsel, and the arbitrators. Id. Because defendants lost the

arbitration, they now want clause (i) to limit their express waiver, but that waiver was

unconditional. Moreover, defendants’ argument is contrary to the waiver’s purpose—to

bar any post-arbitration challenges to arbitrator partiality after the parties had been given

months to ask any question they wanted.

Despite the fact that the entire purpose of the waiver was to preclude after-the-fact

litigation challenging the arbitrators, the defendants and the district court rely on the

misconception that a waiver, voluntarily and knowing made, means nothing when a party

later claims that there are facts it would have liked to know. Thus, defendants incorrectly

assert that “one cannot waive what one does not know.” Aple. Br. 39. Waiver is the

intentional relinquishment of a “known right”—here, the right to raise an evident-

partiality challenge—so a party can waive its known rights even if it does not know all of

the facts. Dallas Area Rapid Transit v. Dallas Morning News, 4 S.W.3d 469, 475 (Tex.

App.—Dallas 1999, orig. proceeding) (emphasis added); Pratt-Shaw v. Pilgrim’s Pride

Corp., 122 S.W.3d 825, 831 (Tex. App.—Dallas 2003, pet. denied). Courts consistently

enforce express partiality waivers in arbitration. See, e.g., Theis Res., Inc. v. Brown &

6

Bain, 400 F.3d 659, 666 (9th Cir. 2005); Fininen v. Barlow, 47 Cal.Rptr.3d 687, 691

(Cal. Ct. App. 2006). Further, whether a waiver is enforceable is a legal conclusion, not a

finding of fact, as defendants incorrectly suggest. Aple. Br. 40.

Defendants are also mistaken in their related attempt to evade their express waiver

by interpreting it as only “waiv[ing] objection to any conflicts and potential conflicts

evident from facts that Stern and the other arbitrators actually disclosed.” Aple. Br. 40.

In addition to the fact that all of the objected-to relationships were evident from Stern’s

disclosures, see infra sections I.B. and II, defendants’ argument contradicts both the plain

language and the intent of the parties’ “Waiver of Conflicts.” PX 7 at 9.

In fact, defendants’ position would render the express waiver meaningless. As

explained below in section I.B, even without an express waiver, a party waives an

evident-partiality challenge if it has actual or constructive knowledge of facts underlying

the challenge but fails to object during arbitration. Thus, for the express waiver to have

any meaning, it must waive something more than what had already been waived by

operation of law. In this case, the waiver necessarily included challenges based on

previously disclosed relationships, and defendants were given—but declined—every

opportunity to ask further questions about these relationships.

Nor can defendants negate their express waiver by characterizing Stern’s

disclosure as “intentionally misleading,” Aple. Br. 41, because the arbitrator’s subjective

intent is irrelevant to the waiver inquiry. Waiver analysis considers the party’s

knowledge and intent—not the arbitrator’s knowledge and intent. Dallas Area Rapid

7

Transit, 4 S.W.3d at 475.3 Defendants knew that they had a right to an impartial

arbitration panel, exercised their right to ask Stern for additional information, had a right

to challenge Stern’s appointment at the time of the arbitration, and also had a right to

raise postarbitration partiality challenges. They knew about each of the relationships they

later complained about. They willingly waived those rights and went forward with the

arbitration.

B. Defendants Also Waived the Challenge Because They Did Not Timely Raise It Despite Knowing the Underlying Facts.

Even absent an express waiver, defendants waived their evident-partiality

challenge by failing to object until after they lost the arbitration. Defendants were on

notice of Stern’s alleged conflicts before the arbitration had ended because Stern

disclosed the underlying relationships and related facts in sufficient detail to, at a

minimum, put defendants on inquiry notice of them.

A party waives an evident-partiality challenge if it has actual or constructive

knowledge of facts underlying the challenge and fails to raise it during arbitration.4

Johnson v. Korn, 117 S.W.2d 514, 520-21 (Tex. Civ. App.—El Paso 1938, writ ref’d);5

Kendall Builders Inc. v. Chesson, 149 S.W.3d 796, 805 (Tex. App.—Austin 2004, pet.

denied). The Texas Supreme Court has specifically endorsed the holding that “[t]he 3 Had defendants been induced into the waiver by fraud—that is, fraudulent inducement of the waiver itself—then it would be ineffective. See Voskamp v. Arnoldy, 749 S.W.2d 113, 124 (Tex. App.—Houston [1st Dist.] 1987, writ denied); Pardee v. Universal Life Ins. Co., 170 S.W.2d 852, 855 (Tex. Civ. App.—Waco 1943, no writ). But the district court did not suggest or find fraud, or even analyze its elements. 4 Many other jurisdictions hold that a party waives an evident-partiality challenge when it fails to raise it despite actual or constructive knowledge of the underlying facts. See, e.g., Fid. Fed. Bank, FSB v. Durga Ma Corp., 386 F.3d 1306, 1313 (9th Cir. 2004); Kiernan v. Piper Jaffray Cos., 137 F.3d 588, 593 (8th Cir. 1998); Daiichi Hawai’i Real Estate Corp. v. Lichter, 82 P.3d 411, 432 & n.18 (Haw. 2003); J.P. Stevens & Co. v. Rytex Corp., 312 N.E.2d 466, 469 (N.Y. 1974); Dornbirer v. Kaiser Found. Health Plan, 83 Cal.Rptr.3d 116, 125 (Cal. Ct. App. 2008). 5 Johnson v. Korn, has the same precedential value as a Texas Supreme Court opinion, because it is a “writ refused” case decided after 1927. Yancy v. United Surgical Partners Int’l, Inc., 236 S.W.3d 778, 786 n.6 (Tex. 2007).

8

defeated party cannot object to an award if, knowing of the existence of conditions which

may influence the judgment of an arbitrator or referee or having notice of the partiality of

one or more referees, sufficient to put him on inquiry, he is silent.” Johnson, 117 S.W.2d

at 521 (emphasis added); see also Champlin Oil & Ref. Co. v. Chastain, 403 S.W.2d 376,

389 (Tex. 1966) (“[I]mputed actual notice carries with it the same legal consequences as

conscious knowledge.”). Being put on inquiry means that “such inquiry, pursued with

reasonable diligence, would have necessarily discovered the real facts upon which their

claim . . . in this suit is predicated.” Moran v. Alder, 570 S.W.2d 883, 887 (Tex. 1978);

see Champlin, 403 S.W.2d at 389 (party has notice of “those things which a reasonably

diligent inquiry and exercise of the means of information at hand would have disclosed”

(quotation omitted)).

Defendants and the district court incorrectly suggest that a party cannot relinquish

“something” it did not know existed. But, in fact, defendants can and do relinquish a

challenge, when the “something” they do not know is additional facts about a disclosed

relationship, of which they have inquiry notice, and as to which they were given the

opportunity to inquire but chose not to. Johnson, 117 S.W.2d at 521. This is a legal—

not factual—question. See Slater v. Nat’l Med. Enters., 962 S.W.2d 228, 234 (Tex.

App.—Fort Worth 1998, pet. denied) (“[a]s a matter of law” appellant “was on inquiry

notice”); Jones v. Fuller, 856 S.W.2d 597, 604 (Tex. App.—Waco 1993, writ denied)

(rejecting trial court’s “erroneous legal conclusion[]” that party lacked “constructive or

inquiry notice”).

9

Here, defendants had inquiry notice, if not actual knowledge, of every challenge

they now raise—Stern’s relationship with Lexsite, the individual Nixon Peabody lawyers

who recommended Stern in other arbitrations, and the alleged connection with the Ada

Cogeneration arbitration. See Johnson, 117 S.W.2d at 520-21; Kendall Builders, 149

S.W.3d at 805; Moran, 570 S.W.2d at 887 (finding constructive notice based on

knowledge of facts that reasonably should have prompted further inquiry).

Defendants’ evident-partiality challenge related to the Lexsite relationship is that

an objective observer might think that Stern would rule for Nixon Peabody’s client to

encourage Nixon Peabody to give Lexsite business, based on his connection to Lexsite

and his participation in soliciting Nixon Peabody’s business. See Aple. Br. 35. But

Stern’s disclosures in August 2006 gave defendants actual knowledge of the basis for

that challenge. Stern disclosed the key facts relating to this Lexsite position, his

attendance at the meeting as a Lexsite representative, and that the purpose of the meeting

was for Lexsite to discuss with Nixon Peabody how Lexsite could be used to outsource

discovery work. DX 16, PX 65. This gave defendants actual knowledge of the Lexsite

relationship, regardless of whether they knew the precise extent of Stern’s financial stake

in Lexsite, which was de minimis.6 See Kendall Builders, 149 S.W.3d at 804-05. At a

minimum, Stern’s disclosures gave defendants constructive notice of these facts. His

disclosure that he was a Lexsite director would have indicated to a reasonable party in

6 Stern’s interest in Lexsite was “a token investment,” which was “not a significant investment” but rather an accommodation based on his seat on Lexsite’s advisory board. DX 299 at 88-89, 235. Stern only had a minimal financial stake in Lexsite—3,000 shares worth $1,300, which was less than 0.04% of Lexsite’s outstanding stock, and an option to purchase 10,000 more. Id. And uncontroverted record evidence establishes that Stern’s stock options were “out-of-the-money.” Stern testified that his options “ha[d] no appreciation,” DX 299 at 88, and that a private stock placement had priced Lexsite’s shares below the option’s strike price, id. at 234-35.

10

defendants’ position that Stern may have had a meaningful financial interest in Lexsite

because directors often have financial stakes in the business.

Defendants also complain they did not know that Stern “was Lexsite’s primary

representative in the U.S., that he had both actual and expected financial interests in

Lexsite, that he and his law firm provided services to Lexsite, and that he was involved in

promoting Lexsite’s business to Penski, Boland, and others.” Aple. Br. 33. But they

were on inquiry notice of all these facts as well. Stern, a respected Washington, D.C.

attorney, disclosed that he was a director of Lexsite, an Indian legal services company.

DX 16; PX 65. And since directors often have stakes in their businesses, defendants

were on inquiry notice of Stern’s interest in Lexsite and that he provided services to

Lexsite.

The same is true of defendants’ complaint that “Stern’s listing of ‘contacts with

Nixon Peabody’ did not disclose his specific relationships with Ponderosa’s arbitration

counsel, Penski and Boland.” Aple. Br. 30. Stern’s disclosure that Nixon Peabody

clients had named him as an arbitrator in three other arbitrations, DX 16, would have led

a reasonable party to think it was likely that the Nixon Peabody attorneys in this

arbitration (Penski and Boland) also recommended him for the other three—or at least

was enough of a possibility that they should ask if they thought it important. Thus,

defendants were on inquiry notice that Stern had a direct relationship with Penski and

Boland, because they knew Penski and Boland represented Ponderosa in this case, and

that Nixon Peabody clients had named him as an arbitrator in this arbitration, two other

11

arbitrations within three months of his appointment in this case, and another arbitration

four years earlier.

Further, defendants complain that Stern should have “identified Penski’s direct

involvement in the Ada Cogeneration arbitration and the common-parent connection

between Ada and Ponderosa through Delta Power.” Aple. Br. 36-37. Setting aside that

no connection existed at the time of the arbitration and thus it is unclear how any

connection could have biased Stern, see infra at section II.B, defendants were on inquiry

notice of the relevant facts. Stern disclosed his appointment in the Ada Cogeneration

arbitration. DX 16. Given that the same law firm recommended him, in an arbitration

where there was a purported connection between the corporate entities involved,7 a

reasonable party in defendants’ position would have thought it possible if not likely that

the same attorneys also represented Ada Cogeneration and recommended Stern in that

arbitration. Moreover, if defendants had deemed this relevant, they could have asked

Stern who he had worked with at Nixon Peabody.8

Finally, defendants easily could have made inquiry “with reasonable diligence”

into Stern’s disclosed relationships. Moran, 570 S.W.2d at 887; Lagstein v. Certain

Underwriters at Lloyd’s, London, 607 F.3d 634, 646 (9th Cir. 2010). Indeed, very little

diligence was required at all. Defendants did not have to check into Stern’s background

7 See Aplt. Br. 28-29 n.8 (discussing evidence showing defendant’s knowledge during the arbitration proceeding that Ada Cogeneration was indirectly owned by Delta Power). Even if defendants obtained this knowledge after the arbitration proceeding commenced, they needed to raise an evident-partiality challenge based on this fact during the arbitration to preserve the objection. Burlington N. R.R. Co. v. TUCO Inc., 960 S.W.2d 629, 637 n.9 (Tex. 1997); see also Theis Res., Inc., 400 F.3d at 666. 8 The disparity of effort between making that minimal follow up inquiry at the time, and defendants’ exhaustive postarbitration investigation into Stern, confirms that defendants’ professed concern about not knowing the specific lawyers’ names is driven by the result, not by a concern that would be shared by any objective observer.

12

or hire a private investigator—though they took these exact steps after losing the

arbitration. 4 RR 80-81, 87. Rather, all they had to do was ask as part of their other

requests that they made to Stern and Justice Baker for follow-up information. PX 115;

DX 279. Had defendants made even a minimal inquiry into Stern’s disclosed

relationships, they would have obtained all of the additional facts they now complain

about not knowing.

Since defendants were on either actual or inquiry notice of every relationship that

they now complain about, could have discovered further facts through a reasonably

diligent inquiry, and yet chose not to inquire further, their evident-partiality challenge is

waived.9 Defendants cannot negate their waiver by characterizing Stern’s disclosure as

“intentionally misleading,” Aple. Br. 41, because the arbitrator’s intent is irrelevant in

examining whether a party had actual or constructive knowledge of facts underlying an

evident-partiality objection during arbitration.10

Defendants strain to distinguish Kendall Builders as “involv[ing] arbitrating

parties who had actual knowledge.” Aple. Br. 43. But Kendall Builders involved both

9 See, e.g., Power Servs. Assocs. v. UNC Metcalf Servicing, 338 F.Supp.2d 1375, 1381 (N.D. Ga. 2004) (evident-partiality objection waived when arbitrator disclosed relationship and party “did not ask about the nature or extent of the existing relationship”); Lummus Global Amazonas v. Aguaytia Energy del Peru S.R. Ltda., 256 F.Supp.2d 594, 625-26 (S.D. Tex. 2002) (“Jaffe’s disclosure . . . made it clear that Arent Fox and Goode had done work for an investor in Aguaytia, and may have done or supervised work for Aguaytia itself, but provided no details as to the specific substance of that work. The disclosure put LGA ‘on notice’ of the circumstances they now allege are potentially disqualifying—that one of Jaffe’s law partners had done work for Aguaytia itself and ‘substantial work’ for an investor in Aguaytia.”); Canajoharie Cent. Sch. Dist. v. Canajoharie United Sch. Emps., 485 N.Y.S.2d 866, 868 (N.Y. App. Div. 1985) (“[S]ince the biographical data card contained facts sufficient to put petitioner on inquiry notice of that relationship, it may not now claim bias based on the failure to disclose such relationship.”). 10 See, e.g., Vigorito v. UBS PaineWebber, 557 F.Supp.2d 303, 307 (D. Conn. 2008) (partiality challenge waived when arbitrator disclosed that his “son worked for the defendant,” even though arbitrator “misrepresented the details of his son’s employment with PaineWebber”). Defendants assert that neither Vigorito nor Daiichi Hawaii involved “intentionally misleading” disclosures. Aple. Br. 41-42. But in both cases it is unclear whether the arbitrator’s misinformation was intentional or not, precisely because both courts in deciding whether there had been a waiver did not focus on the arbitrator’s intent, but solely on the information given to the party who raised the belated partiality challenge. Vigorito, 557 F.Supp.2d at 307; Daiichi Hawai’i, 82 P.3d at 433-35 & n.19.

13

actual and constructive knowledge, in a very similar way to this case. In Kendall

Builders, the party had actual “knowledge of the arbitrator’s stock losses,” but not of the

“extent of the arbitrator’s losses.” 149 S.W.3d at 805. The court relied on both the

party’s actual and constructive knowledge to find waiver. See id. (“the information

divulged by the arbitrator was sufficient to place them on notice of the facts giving rise to

what they now contend is a reasonable possibility of partiality” (emphasis added)); see

also id. (unraised partiality challenge is waived when the “party has knowledge of facts

possibly indicating bias or partiality on the part of the arbitrator”). Here, defendants had

actual, specific knowledge about Stern’s disclosed relationships with Lexsite and Nixon

Peabody, and constructive knowledge of the other facts based on which they would later

object. Just as in Kendall Builders, defendants’ actual and constructive knowledge,

coupled with their failure to object, effected a waiver. Id.

While Kendall Builders shows how this case fits within the law finding waiver

based on disclosure plus failure to object, Alim v. KBR (Kellogg, Brown & Root)-

Halliburton, 331 S.W.3d 178 (Tex. App.—Dallas 2011, no pet. h.), shows how different

this case is from one in which there is no waiver. In Alim the arbitrator affirmatively

misled the parties by saying that none of the party representatives had appeared before

him in past arbitrations, when the respondent’s party representative (Graves) had. Id. at

180. The arbitrator later said that he had “over the years come across” Graves, “but in

terms of this case, I have absolutely no interest involving [respondent] or—or anything

else.” Id. The Court concluded that the arbitrator’s “come across” comment, in the

context of the previous false denial, did not give the party sufficient facts to know or

14

suspect that Graves had previously appeared before the arbitrator as a party

representative. Id. at 182. Therefore, the partiality challenge had not been waived. Id.

But in this case Stern did not deny prior relationships with Lexsite or Nixon

Peabody—he disclosed them. Nor did he make his disclosures using an indefinite phrase

like “come across”—he specified his positions with Lexsite, the date of the meeting he

attended, and the matter names and times of his appointment in other arbitrations. If an

arbitrator denies having a relationship, then discloses a vague (and, given the previous

denial, implicitly different) acquaintance, that is not enough to give inquiry notice of the

relationship and effect a waiver. But if the arbitrator discloses a specific relationship,

provides material details, and is willing to answer any follow-up questions, the party is

put on inquiry and waives its partiality challenge if it fails to inquire or object. See

Kendall Builders, 149 S.W.3d at 805; Power Servs. Assocs., 338 F.Supp.2d at 1381.

To establish a rule that would permit defendants to raise an evident-partiality

challenge based on relationships that had been disclosed when Stern was first appointed

as an arbitrator in this case would “would seriously jeopardize the finality of arbitration,”

and give “losing parties . . . an incentive to conduct intensive, after-the-fact

investigations” and pursue “[e]xpensive satellite litigation,” like this case. Positive

Software Solutions v. New Century Mortg. Corp., 476 F.3d 278, 285 (5th Cir. 2007) (en

banc). It would also thwart arbitration’s purpose “to avoid steep litigation expense—

including the costs of longer proceedings.” In re Olshan Found. Repair Co., 328 S.W.3d

883, 894 (Tex. 2010). Indeed, it would encourage a scenario where parties first go

through arbitration, then incur “steep litigation expense” in a subsequent extensive and

15

contentious partiality challenge. Id. And it invites “sandbagging” that courts have

condemned. Dean v. Sullivan, 118 F.3d 1170, 1172 (7th Cir. 1997); Fort Hill Builders v.

Nat’l Grange Mut. Ins. Co., 866 F.2d 11, 13 (1st Cir. 1989) (per curiam). Defendants’

professed worry that arbitrators will craft selective or misleading disclosures is

misplaced. Aple. Br. 25-26. Parties that have notice of a relationship can, should, and

will ask about it if they care to know more—as defendants actually did here as to the

relationships they cared about. If they do not ask (because they do not care) then they

can, should, and will be held to their choice.

II. THE EVIDENT-PARTIALITY CHALLENGE FAILS AS A MATTER OF LAW.

A court may only vacate an arbitration award for evident partiality if an arbitrator

fails to disclose a relationship with a party or its representative that might, to an objective

observer, create a reasonable impression of the arbitrator’s partiality. Thomas James

Assocs., Inc. v. Owens, 1 S.W.3d 315, 320 (Tex. App.—Dallas 1999, no pet.). A party

raising an evident-partiality challenge faces a “heavy,” even “onerous,” burden. Int’l

Bank of Commerce-Brownsville v. Int’l Energy Dev. Corp., 981 S.W.2d 38, 44 (Tex.

App.—Corpus Christi 1998, pet. denied); Mantle v. Upper Deck Co., 956 F.Supp. 719,

729 (N.D. Tex. 1997). This Court reviews de novo the district court’s conclusion of

evident partiality and the materiality of particular nondisclosures, and “all reasonable

presumptions are indulged in favor of the award, and none against it.” In re Chestnut

Energy Partners, Inc., 300 S.W.3d 386, 397 (Tex. App.—Dallas 2009, orig. proceeding).

Stern disclosed every relationship that defendants now claim he disclosed in insufficient

detail. And he did so in sufficient detail to place defendants on inquiry notice about

16

every fact about which they now complain, and the details he did not disclose are

immaterial in light of the disclosures he did make.

Defendants try to evade the high hurdles the law sets for evident-partiality

challenges by parroting the trial court’s factual findings and incorrectly suggesting this

Court is limited to sufficiency review. See Las Palmas Med. Ctr. v. Moore, __ S.W.3d

__, 2010 WL 3896501, at *6-*7 (Tex. App.—El Paso Oct. 6, 2010, pet. denied) (rejecting

argument that because evident partiality “is necessarily fact-intensive,” appellate courts

“may only review the sufficiency of the evidence”). Whether the undisclosed facts would

create in an objective observer a reasonable impression of partiality is a question of law.

Owens, 1 S.W.3d at 321; see Henry v. Halliburton Energy Servs., 100 S.W.3d 505, 509

(Tex. App.—Dallas 2003, pet. denied).

A. The Evident-Partiality Standard Requires Sufficient Disclosure of Relationships, Not Disclosure of All Details.

Defendants misconstrue the law and Ponderosa’s arguments, when they suggest

that the Court is limited to requiring either (1) only a “cursory listing of general

‘relationships,’” Aple. Br. 19, or (2) encyclopedic factual disclosure of the sort demanded

by the district court below. Disclosing “any past or present relationship” is exactly what

the AAA rules require, AAA Rule R-16(a), and defendants acknowledge that these rules

are “[c]onsistent with th[e] standard” articulated in TUCO and Commonwealth Coatings.

Aple. Br. 14. Disclosing a relationship in sufficient detail to understand the nature of the

relationship is exactly what Texas law requires.

17

Defendants set up a strawman by falsely claiming that Ponderosa’s argument is

“that simply mentioning a ‘relationship’ satisfies the TUCO requirement for full factual

disclosure.” Aple. Br. 25. Rather, as Ponderosa has argued, to satisfy TUCO “the

information divulged by the arbitrator [must be] sufficient to place them on notice of the

facts giving rise to what they now contend is a reasonable possibility of partiality.”

Kendall Builders, 149 S.W.3d at 805. As defendants agree, “sufficient” means “enough

detail to give fair notice when a relationship might reasonably affect impartiality or lack

of independence.” See Aple. Br. 23.

B. Stern’s Disclosures Were More Than Sufficient to Defeat Defendants’ Evident-Partiality Challenge.

Defendants’ minimal-disclosure strawman ignores Stern’s thorough disclosure of

the several ties that constituted his relationship with Ponderosa’s counsel. Stern advised

defendants that he had been appointed as arbitrator in four matters on Nixon Peabody’s

recommendation and that, as a member of a corporate board, he had assisted Lexsite in

unsuccessful efforts to solicit business from Nixon Peabody.11 Since Stern disclosed

those potentially compromising connections, defendants are left to argue that they did not

know certain details about those ties. But defendants indisputably had sufficient

information to object to Stern if those connections had raised any concern of possible

partiality toward Ponderosa, or to inquire further if they thought there was even a

possibility of a concern. As Kendall Builders, Moore, and a host of other decisions make

11 Stern initially overlooked the Ada Cogeneration arbitration, an oversight Boland ensured he corrected. Defendants complain that Boland’s editing of Stern’s disclosures, which only added and never removed information, somehow suggests impropriety. Defendants misleadingly suggest that Boland directed Stern not to mention certain details or demanded that they be stricken from his draft, but the record shows that Boland never instructed or asked Stern to remove or omit details from his disclosures. See PX 69; DX 297 at 42-43, 54; DX 298 at 55-57.

18

clear, that degree of disclosure is sufficient as a matter of law. E.g., Kendall Builders,

149 S.W.3d at 805; Moore, 2010 WL 3896501, at *11 (reversing vacatur when an

arbitrator’s relationship with party’s counsel was disclosed and went unquestioned and

unchallenged, even though the arbitrator omitted details about the relationship).12

“[N]ot all instances of nondisclosure constitute evident partiality,” and Stern’s

nondisclosures cannot justify vacatur on the basis that specific additional (but

undisclosed) details about Stern’s relationships would have caused an objective observer

to have a reasonable impression that Stern was partial. Owens, 1 S.W.3d at 321; see

Positive Software, 476 F.3d at 282-83 (nondisclosure “must involve a significant

compromising connection”). Instead, in the context of Stern’s disclosures, none of the

omitted details was objectively material. See Alim, 331 S.W.3d at 182 (noting

importance of “the context of [an arbitrator’s] prior representation[s]”); Power Servs.

Assocs., 338 F.Supp.2d at 1379-81 (rejecting evident partiality based on arbitrator’s

previous role as party’s lawyer when arbitrator disclosed his firm’s ongoing

representation of the same party).

Lexsite. Defendants complain that, despite being told that Stern sat on Lexsite’s

board of directors and arranged meetings with Nixon Peabody when Lexsite solicited the

firm’s business, DX 16; PX 65, they did not know that Stern owned shares in Lexsite or

how many he owned. But sophisticated parties like defendants would have known he

12 In Moore, the omitted details were more extensive than those defendants complain about here—such as “the nature of the cases,” that the arbitrator litigated alongside Jackson Walker, “whether [the arbitrator] was co-counsel with [Las Palmas’s attorneys] James and Wu,” “whether the representation was in the past or continued at the time of her [disclosure],” “whether [the arbitrator] referred the clients in those cases to James or Wu, whether [James or Wu] referred the clients to [the arbitrator],” and “whether referral fees were exchanged.” Moore, 2010 WL 3896501, at * 11.

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likely owned shares. See Eric G. Orlinsky, Corporate Opportunity Doctrine and

Interested Director Transactions, 24 DEL. J. CORP. L. 451, 518 (1999).

Defendants also complain that, despite knowing that a Stern attended a

prearbitration meeting between Nixon Peabody and Lexsite and that there was a

possibility (though not a likelihood) for potential future business, DX 16, they did not

know about later contacts between Lexsite personnel and Nixon Peabody. But Stern did

not know about those contacts and could neither have disclosed them nor have been

influenced by them. See Mariner Fin. Group v. Bossley, 79 S.W.3d 30, 33 (Tex. 2002)

(noting that an undisclosed fact “could not have influenced” an arbitrator’s impartiality

“if, in fact, he was unaware of it during the arbitration”); Casden Park La Brea Retail

LLC v. Ross Dress For Less, Inc., 75 Cal.Rptr.3d 763, 770 (Cal. Ct. App. 2008).

Nor does the analysis change because Stern continued to represent Lexsite after

his appointment in ways not involving Nixon Peabody—for example, by assisting in

incorporating Lexsite’s American subsidiary. See, e.g., Hunt v. Mobil Oil Corp., 654

F.Supp. 1487, 1500-01 (S.D.N.Y. 1987) (rejecting as “remote and speculative” a claim

that an arbitrator’s firm’s representation of third parties in negotiations with parties to the

arbitration justified evident-partiality vacatur). What is material is not the depth of

Stern’s involvement with Lexsite (beyond his disclosure of information more than

sufficient to indicate his alleged incentive to see it succeed), but rather Lexsite’s

connection to Nixon Peabody—which was fully disclosed and did not change after his

appointment. Finally, there is no force to defendants’ complaint that Stern disclosed too

much about his Lexsite ties in one respect, with his truthful statement that Lexsite and

20

Nixon Peabody had not done business and there was no certainty they would in the

future. That statement obscured nothing about the relationship; it was true.

Defendants’ argument that Stern exhibited evident partiality by failing to disclose

additional details about Lexsite and its contacts with Nixon Peabody closely parallels the

argument rejected in Nationwide Mutual Insurance Co. v. Home Insurance Co., 278 F.3d

621, 626-27 (6th Cir. 2002). In Nationwide, the objecting party claimed partiality

because the arbitrator failed to disclose some of his meetings with a party to market his

legal services, but the court rejected that argument because the arbitrator had disclosed

that he had two such meetings, because no business relationship had formed, because the

arbitration had never been discussed in any meetings, and because the complaining party

“did not begin its attacks on [the arbitrator’s] purported bias until after” it lost the

arbitration. Id.13 Each of these points matches up with this case: Stern disclosed his

Lexsite/Nixon Peabody meeting, Lexsite never did business with Nixon Peabody, neither

Stern nor anyone from Lexsite discussed the arbitration in the meeting, and defendants

never objected to or questioned Stern’s Lexsite ties until they lost the arbitration.

Nixon Peabody. Defendants also complain that, despite knowing that Nixon

Peabody had repeatedly recommended Stern as an arbitrator, and that Penski and Boland

had proposed him for this arbitration, DX 16, they were unaware that Penski and Boland

13 Defendants incorrectly assert that Nationwide’s analysis “focuses not just on a ‘relationship,’ but on [the] specific meetings.” Aple. Br. 23. But the Sixth Circuit rejected the claim in part because the arbitrator disclosed two meetings but omitted a third. 278 F.3d at 626-27. Because the additional details did not change the nature of the disclosed relationship, the court rejected the challenge. Id.

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were involved in those other arbitrations.14 But it was sufficient for Stern to disclose his

ties to Nixon Peabody without naming Penski and Boland individually. An attorney’s

disqualifying relationship is imputed to every other attorney in the firm. Nat’l Med.

Enters. v. Godbey, 924 S.W.2d 123, 131 (Tex. 1996). Indeed, Moore rejected vacatur

and found disclosures sufficient when the arbitrator disclosed that “she had represented

clients in matters in which Jackson Walker represented clients adverse to and aligned

with her clients,” even though she failed to name individual Jackson Walker lawyers

involved in the arbitration. 2010 WL 3896501, at *11.15 Nor are the cases defendants

cite to “refute” this proposition to the contrary.16

From an objective observer’s viewpoint, the relevant fact was that the

recommendation came from Nixon Peabody. See id. Defendants suggest that “the most

important relationship fact” was that Stern had dealt with Penski and Boland. Aple. Br.

32. But they cannot explain why they never asked about this “most important” detail

even though they knew Stern had been repeatedly recommended by someone at Nixon

Peabody, in circumstances that suggested that it was Penski and Boland. See PX 65.

That the effort to inquire was so minimal shows that it would have made no difference to

14 Defendants concede that Stern did not know some details that they now complain about, like the fact that Boland recommended him in the J3 Technologies arbitration. DX 299 at 180-81; Aple. Br. 5 n.5. 15 Defendants try to distinguish Moore by claiming that the party seeking vacatur “did not point to additional facts or details that allegedly should have been disclosed but were not.” Aple. Br. 25. But Moore argued that the arbitrator should have revealed more details about her disclosed relationship with counsel. The court rejected that argument and reversed the order vacating the arbitration award. Moore, 2010 WL 3896501, at *11. 16 Defendants cite cases in which disclosure of an arbitrator’s relationship with a particular lawyer excused nondisclosure of a relationship with the lawyer’s firm. See ALS & Assocs. v. AGM Marine Constructors, 557 F.Supp.2d 180 (D. Mass. 2008); Montez v. Prudential Sec., Inc., 260 F.3d 980 (8th Cir. 2001); Lifecare Int’l v. CD Med., 68 F.3d 429 (11th Cir. 1995). That does not imply that nondisclosure is condemned when an arbitrator discloses the firm but not specific lawyers’ names; if anything, it suggests the opposite. Defendants also cite Moore, Lagstein, and Dornbirer. Aple. Br. 31-32. In those cases the arbitrators disclosed both relationships with the parties’ law firms and individual counsel, but in none did a court say that the distinction between naming the firm and naming the individual lawyer was even salient.

22

defendants if they had known the same lawyers were involved. Nor would a reasonable

observer be given pause by Stern’s disclosing the firm without naming the specific

lawyers. Defendants’ complaint is that they did not get Stern’s “complete and

unexpurgated business biography,” which is no basis for vacatur. Commonwealth

Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145, 151 (1968) (White, J., concurring).

Even if disclosing the firm was meaningfully different from disclosing individual

lawyers, Stern’s interest in future reemployment as an arbitrator cannot establish evident

partiality: “[T]he interest in potential future employment is endemic to arbitration that

permits parties to choose who will decide. . . . A court cannot properly deem the interest

in reemployment created by this arrangement a disqualifying event.” Trustmark Ins. Co.

v. John Hancock Life Ins. Co., 631 F.3d 869, 873 (7th Cir. 2011).

Ada Cogeneration. Defendants complain that, despite knowing that Stern was

concurrently serving as arbitrator in a proceeding involving Ada Cogeneration, they did

not know it was indirectly owned by Delta Power, which had once owned Ponderosa

(though it no longer did at the time of the arbitration). Defendants offer no coherent

explanation of how this tie, which bore no relationship to any issue in this arbitration,

could have resulted in Stern’s partiality to Ponderosa.17 In any event, it is unclear

whether Stern knew about the prior overlap in Delta Power’s ownership interests in

Ponderosa and Ada at any point before the latest time that defendants’ counsel would

have learned it from evidence at the arbitration hearing. And defendants knew of the

17 On appeal, defendants essentially abandon the Ada Cogeneration argument as it was presented to the district court, instead rehashing the argument that disclosure of Nixon Peabody’s role in the Ada Cogeneration arbitration was not sufficient, given Penski’s involvement. See Aple. Br. 36-38. That argument fails, as explained above.

23

overlapping ownership before the arbitration even began, though they paid no attention to

that fact until after they lost the arbitration. Aple. Br. 37-38 n.13.

All of these supposed gaps in defendants’ knowledge are squarely attributable to

their own failure to ask any questions about additional details of the purportedly

compromising relationships between Stern and Nixon Peabody, despite being put on

inquiry notice by Stern’s disclosures. See Kendall Builders, 419 S.W.3d at 805; Part I.B

supra. In any event, none of these details is objectively sufficient to create a reasonable

impression of partiality in an observer who was already aware of the relationships (and

details about them) that Stern did disclose.

This case is thus far distant from Alim, Houston Village Builders, Inc. v. Falbaum,

and other vacatur cases on which defendants rely. 105 S.W.3d 28, 34-35 (Tex. App.—

Houston [14th Dist.] 2003, pet. denied). Alim turned not on minimizing or even

completely failing to disclose relationships, but on the arbitrator’s unambiguous

falsehoods that a party’s counsel had never appeared before him—which were not cured

by his later statement that he had “come across” that lawyer. 331 S.W.3d at 182. The

arbitrator’s bare statement in Houston Village Builders that he “worked with” a trade

association to which one of the parties belonged, which was at best “ambiguous as to

whether he was ever the [association’s] attorney,” is easily distinguished from Stern’s

disclosure of his several interactions with Nixon Peabody. 105 S.W.3d at 34-35. Here,

Stern disclosed his position with Lexsite, his participation in its attempts to seek business

from Nixon Peabody, and his selection in other arbitrations at Nixon Peabody’s

recommendation.

24

Finally, defendants misdirect the Court, as they did the district court, by

smuggling irrelevant issues about Stern’s subjective intent into the prescribed objective

analysis.18 Evident partiality is determined by the fact of “the nondisclosure itself,”

coupled with the materiality of the undisclosed information, not by insinuations about the

arbitrator’s intent. TUCO, 960 S.W.2d at 636. And intent is immaterial to an evident

partiality claim (as opposed to an actual-bias challenge) for good reason: Permitting post

hoc investigations to divine an arbitrator’s purported bad intent will discourage

experienced arbitrators from serving. See Positive Software, 476 F.3d at 285-86 (“[T]he

best lawyers and professionals . . . have no need to risk blemishes on their reputations

from post-arbitration lawsuits attacking them as biased.”).

Accepting defendants’ arguments would encourage arbitration losers to investigate

and attack the arbitrator in hopes of devising a story of lurking bias. See id. at 285. And

it would disserve arbitration’s “fundamental purpose” of “provid[ing] a rapid, less

expensive alternative to traditional litigation” staffed by competent arbitrators.

Prudential Sec., Inc. v. Marshall, 909 S.W.2d 896, 900 (Tex. 1995).

CONCLUSION AND PRAYER

For these reasons, appellant requests the Court reverse the district court’s decision

and remand the case for approval of the arbitration award.

18 Defendants go far beyond the district court’s findings to attack Stern’s character and motives. E.g., Aple. Br. 29, 35, 36 (claiming Stern “abdicated his duty” and “participated and acquiesced in a subterfuge,” describing his disclosure as “not a good faith effort to disclose,” and ascribing to Stern a “practice of obscuring facts that should have been disclosed”). Such attacks are not relevant in this appeal; defendants lost their actual-bias claim below and have not raised it on appeal. See Hunt, 654 F.Supp. at 1495 (“[P]erjorative charges of partiality and fraudulent and corrupt conduct levelled at the arbitrators . . . are not a substitute for evidentiary proof.”).

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Respectfully submitted,

____________________________ Edward C. Dawson State Bar No. 24031999 Marc S. Tabolsky State Bar No. 24037576 Ryan P. Bates State Bar No. 24055152 Scott A. Keller State Bar No. 24062822 YETTER COLEMAN LLP 221 West Sixth Street, Suite 750 Austin, Texas 78701 [Tel.] (512) 533-0150 [Fax] (512) 533-0120

Michael W. Huddleston State Bar No. 10148415 B. Frank Cain State Bar No. 0367500 SHANNON, GRACEY, RATLIFF & MILLER, L.L.P. 777 Main Street, Suite 3800 Fort Worth, Texas 76102 [Tel.] (817) 882-7614 [Fax] (817) 336-3735 Frank H. Penski Constance M. Boland Abigail T. Reardon NIXON PEABODY, LLP 437 Madison Avenue New York, New York 10022 [Tel.] (212) 940-3000 [Fax] (212) 940-3111

ATTORNEYS FOR APPELLANT PONDEROSA PINE ENERGY, LLC

26

CERTIFICATE OF SERVICE

As required by Rules 6.3 and 9.5 of the Texas Rules of Appellate Procedure, I certify that I have served this document on all parties listed below on this 28th day of March, 2011, by certified mail, return receipt requested: John J. McKetta, III Will W. Dibrell GRAVES DOUGHERTY HEARON & MOODY 401 Congress Avenue, Suite 2200 Austin, Texas 78701 [Fax] (512) 480-5863 Counsel for Appellees Tenaska Energy, Inc.; Tenaska Energy Holdings, LLC; and Tenaska Cleburne, LLC

Mike Hatchell Bradley C. Weber Bryce Quine Bradley C. Knapp LOCKE LORD BISSELL & LIDDELL LLP 2200 Ross Avenue, Suite 2200 Dallas, Texas 75201 [Fax] (214) 740-8800 Counsel for Appellee Illinova Generating Co.

Wanda McKee Fowler Howard Close Patrick B. McAndrew WRIGHT BROWN & CLOSE, LLP Three Riverway, Suite 600 Houston, Texas 77056 [Fax] (713) 572-4320 Counsel for Appellee Continental Energy Services, Inc.

Carmen S. Mitchell MITCHELL, GOFF & MITCHELL, LLP 10440 North Central Expressway Suite 1100 Dallas, Texas 75231 [Fax] (214) 651-8506 Counsel for Appellee Continental Energy Services, Inc.

Stephen S. Walters ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS LLP Three Embarcadero Center, 12th Floor San Francisco, CA 94111 [Fax] (415) 837-1516 Counsel for Appellees Tenaska Energy, Inc.; Tenaska Energy Holdings, LLC; and Tenaska Cleburne, LLC

Deborah G. Hankinson HANKINSON LEVINGER LLP 750 North St. Paul Street, Suite 1800 Dallas, Texas 75201 [Fax] (214) 754-9140 Counsel for Appellees Tenaska Energy, Inc.; Tenaska Energy Holdings, LLC; and Tenaska Cleburne, LLC

Edward C. Dawson