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Lower Colorado River Authority v. Papalote Creek II, L.L.C.

United States Court of Appeals, Fifth Circuit

May 31, 2017

LOWER COLORADO RIVER AUTHORITY, Plaintiff - Appellee
v.
PAPALOTE CREEK II, L.L.C., formerly known as Papalote Creek Wind Farm II, L.L.C., Defendant-Appellant

         Appeal from the United States District Court for the Western District of Texas

          Before KING, JOLLY, and PRADO, Circuit Judges.

          KING, Circuit Judge.

         This appeal concerns the district court's grant of a petition to compel arbitration. Defendant-Appellant Papalote Creek II, L.L.C. argues that that the district court did not have jurisdiction to compel arbitration because the underlying dispute between the parties was not ripe, and even if the district court did have jurisdiction, the underlying dispute was outside the scope of the arbitration provision. Because we conclude that the district court lacked jurisdiction to compel arbitration, we VACATE and REMAND.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         A. The Power Purchase Agreement

         Plaintiff-Appellee Lower Colorado River Authority (LCRA) is a conservation and reclamation district based in Austin, Texas, and a political subdivision of the State of Texas. LCRA sells wholesale electric power to municipal-owned utilities and electric cooperatives in Texas. In December 2009, LCRA entered into a Power Purchase Agreement (PPA) with Defendant- Appellant Papalote Creek II, L.L.C. (Papalote), a Delaware limited liability company that builds and operates wind farms. Papalote planned to build an 87-turbine wind farm in Texas (the Project), and under the PPA, LCRA agreed to purchase all of the energy generated by the Project at a fixed price for an 18-year term.

         Relevant to this appeal are four sections of the PPA: § 4.3, § 9.3, § 13.1, and § 13.2. First, § 4.3, which is entitled "Liquidated Damages Due to [LCRA's] Failure to Take, " provides a formula for how to calculate the liquidated damages that LCRA would owe to Papalote in the event that LCRA failed to take all of the Project's energy. As noted above, LCRA is required to take all of the energy generated by the Project. However, should LCRA fail to do so, § 4.3 details how to calculate Papalote's "exclusive remedy" of liquidated damages. This liquidated damages calculation would depend in part on the difference between the PPA's fixed price and the price that Papalote is otherwise able to obtain in selling the energy.

         Second, § 9.3, which is entitled "Limitation on Damages for Certain Types of Failures, " provides the following:

Notwithstanding anything to the contrary in [the PPA], [Papalote's] aggregate liability for (i) failure of [Papalote] to construct the Project and/or (ii) failure of one hundred percent (100%) of the Project's Turbines to achieve the Commercial Operation Date on the Scheduled COD and/or (iii) failure of one hundred percent (100%) of the Project's Turbines to achieve the Commercial Operation Date on June 1, 2011 and/or (iv) a Termination Payment, shall be limited in the aggregate to sixty million dollars ($60, 000, 000). [LCRA's] damages for failure to perform its material obligations under [the PPA] shall likewise be limited in the aggregate to sixty million dollars ($60, 000, 000).

(Emphasis added.) Notably, § 9.3 refers to Papalote's "liability" and LCRA's "damages, " and the parties' underlying dispute is based, in part, on this word choice.

         Finally, § 13.1 and § 13.2 provide a two-step arbitration procedure. The first step, as dictated in § 13.1, requires, inter alia, that "[i]f any dispute arises with respect to either Party's performance hereunder, " the senior officers of LCRA and Papalote meet in an attempt to resolve the dispute. Under the second step, as outlined in § 13.2, if the dispute is not resolved through the first step within a certain timeframe, either party may submit that dispute "to binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association . . . effective at the time of the dispute." Section 13.2 also provides additional details on the arbitration, including that the arbitrator shall use a "baseball" procedure (in which each party puts forth an offer and the arbitrator is limited to choosing one of the two offers).

         B. Negotiations and Petition to Compel Arbitration

         Papalote completed construction of the Project in 2010, and in the ensuing years, LCRA complied with its obligations under the PPA by purchasing all of the energy generated by the Project. In April 2015, however, LCRA initiated discussions with Papalote regarding the PPA. Although the parties dispute the precise nature of these discussions, [1] neither party appears to have threatened to breach the PPA. Ultimately, in June 2015, LCRA sent Papalote a letter stating that, pursuant to ยง 13.2, LCRA was "initiat[ing] the arbitration process to resolve the dispute between LCRA and Papalote regarding LCRA's limitation of liability under the PPA and its impact on LCRA's performance obligations." LCRA also noted that it "intends to continue to fully perform its obligations under the PPA during this arbitration process." After Papalote requested more information about the purported dispute, LCRA sent another letter explaining that the dispute was "whether LCRA's liability is limited to $60, 000, 000 under the PPA." Papalote rejected LCRA's request to proceed to arbitration, reasoning that "[a]n academic question about the damages LCRA might owe for a hypothetical breach simply does not ...


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