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Forest Oil Corporation v. El Rucio Land and Cattle Company, Inc.

Supreme Court of Texas

April 28, 2017

Forest Oil Corporation, now known as Sabine Oil & Gas Corporation, Petitioner,
El Rucio Land and Cattle Company, Inc., San Juanito Land Partnership, Ltd., McAllen Trust Partnership, and James Argyle McAllen, Respondents

          Argued February 8, 2017

         On Petition for Review from the Court of Appeals for the First District of Texas

          Chief Justice Hecht delivered the opinion of the Court, in which Justice Green, Justice Johnson, Justice Willett, Justice Guzman, Justice Lehrmann, Justice Boyd, and Justice Devine joined.

          Justice Brown did not participate in the decision.


         The principal question in this case is whether the Railroad Commission (RRC), which regulates oil and gas operations in Texas, has exclusive or primary jurisdiction over claims for environmental contamination, thus precluding suits for damages and other judicial relief. We answer no. We also decide whether the arbitration award in this case should be vacated for the evident partiality of a neutral arbitrator or because the arbitrators exceeded their powers, [1] and whether the parties agreed to judicial review of the exemplary damages award. Again, we answer no. Accordingly, we affirm the judgment of the court of appeals.[2]


         Through family entities, respondent James A. McAllen controls the 27, 000-plus-acre McAllen Ranch ("the Ranch") once owned by his great-grandfather, for whom the City of McAllen, on the Rio Grande River near the southern tip of Texas, is named. Petitioner Forest Oil Corporation ("Forest") has produced natural gas on the Ranch for over 30 years. Forest's leases cover about 1, 500 acres, and it maintains a processing plant on 5.75 acres.

         In the 1990s, McAllen sued Forest for underpayment of royalties and underproduction of the lease. The parties resolved their disputes with a "Settlement Agreement" and a "Surface Agreement". The latter provided in part:

8. [Forest] will not bring on the Leases any hazardous material . . . . Further [Forest] agree[s] (1) to remove from the Leases, if, as and when required by law, any hazardous material placed or released thereon by [Forest], (2) to perform remedial work where the need therefore arises as a result of and is caused by [Forest's] operations or activities on the Leases, and (3) to comply in all respects with all federal, state and local governmental laws and regulations governing operations by [Forest] and remedial work on or associated with the Leases.
9. [Forest] shall not store or dispose of any hazardous materials on the surface of the Leases. . . .

         The Surface Agreement also incorporated an arbitration provision in the Settlement Agreement.

         In 2004, McAllen learned from a former Forest employee that Forest had contaminated the property. Also, McAllen was told, used oilfield tubing Forest had donated to him for construction of a rhinoceros pen was contaminated with naturally occurring radioactive material (NORM). When McAllen was diagnosed with sarcoma in his ankle, resulting in the amputation of his right leg below the knee, he blamed Forest.

         McAllen sued Forest for environmental contamination, improper disposal of hazardous materials on the Ranch, and maliciously donating the contaminated pipe that caused his injury.[3]Forest moved to compel arbitration, McAllen objected, and the trial court denied the motion. We reversed.[4] Meanwhile, in 2007, McAllen asked the RRC to investigate contamination of the Ranch by Forest. The RRC referred Forest to its voluntary Operator Cleanup Program to propose and implement plans to remediate soil and groundwater conditions affected by its operations on the Ranch. The RRC has approved portions of Forest's proposals but has yet to approve Forest's proposed final remediation plan.

         Arbitration proceeded before a panel of three neutral lawyer-arbitrators. Forest chose B. Daryl Bristow of Houston, and McAllen chose Donato Ramos of Laredo. When Bristow and Ramos could not agree on a third arbitrator, Forest asked District Judge Dion Ramos of Houston (no relation to Donato) to name one, and each side proposed candidates. Judge Ramos chose Clayton Hoover of Austin, whom McAllen had proposed.[5] A divided panel refused Forest's request to abate the proceedings pending final rulings by the RRC and awarded McAllen, as owner of the land, $15 million for actual damages, $500, 000 for exemplary damages, and some $6.7 million for attorney fees; the panel also awarded McAllen, individually, $500, 000 for personal injury actual damages. In addition to these awards, the panel declared:

a. [Forest] has a continuing obligation and duty under the Surface Agreement to locate, remediate, and dispose of all hazardous and non-hazardous materials from the [Ranch] related to [Forest's] operations;
b. [Forest] is required to perform remedial work where the need therefore arises, which shall include the removal of any and all hazardous and non-hazardous materials when those materials are no longer necessary in the conduct of [Forest's] operations on the lease;
c. [Forest] is solely responsible for reimbursing [McAllen] for any future costs and expenses incurred by [McAllen] in conducting investigations which result in the identification of additional locations requiring remediation of hazardous and non-hazardous materials on the [Ranch] resulting from [Forest's] operations; and
d. [ Forest] is solely responsible for all future remediation costs and activities related to pollutants, contaminants, and hazardous and non-hazardous materials that are known to be present and/or discovered under those lands covered by the Surface Agreement.

         The panel also ordered Forest to provide McAllen a $10 million bond to assure its performance of these continuing obligations. Arbitrator Bristow issued a 40-page dissent.

         Forest moved to vacate the award on several grounds. Forest argued that the RRC had exclusive or primary jurisdiction over McAllen's claims, precluding the arbitration. Forest also offered evidence that McAllen had earlier objected to using Ramos as a mediator in another case, apparently to avoid any conflict in Ramos' serving as an arbitrator in this case. McAllen had not communicated with Ramos in the other case, and while the opposing party had contacted Ramos' staff, there was no evidence that Ramos knew of the mediation. Neither McAllen nor Ramos had disclosed these facts to Forest when Forest named Ramos an impartial arbitrator; Forest argued that this nondisclosure showed Ramos' evident partiality and thus required vacatur of the award. Forest also argued that the damages awards were in manifest disregard of Texas law, and that the parties had agreed to expanded judicial review of the arbitration award. The trial court vacated the award's $10 million bond requirement but otherwise denied Forest's motion. The court of appeals affirmed.[6]

         We granted Forest's petition for review.[7] We consider first whether the RRC has exclusive or primary jurisdiction over McAllen's claims, and then whether the grounds for vacatur Forest has raised are valid.


         The RRC has extensive statutory authority to regulate contamination from oil and gas operations. Forest argues that its jurisdiction over those matters is exclusive or at least primary.


         "An agency has exclusive jurisdiction when the Legislature gives the agency alone the authority to make the initial determination in a dispute."[8] As a rule, when an agency has exclusive jurisdiction, a party must exhaust all administrative remedies before seeking judicial review of the agency's action, and then "only at the time and in the manner designated by statute."[9] Until then, the trial court lacks ...

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