OOGC America LLC v. Chesapeake Exploration, L.L.C.

Filing 43

OPINION on Arbitration Corruption. (Signed by Judge Lynn N Hughes) Parties notified. (ghassan, 4)

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

United States District Court
Southern District of Texas

ENTERED
OOGCAmerica liC,
Plaintiff,

versus
Chesapeake Exploration, L.L.c.,
Defendant.

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December 05, 2018
David J. Bradley, Clerk

Opinion on Arbitration Corruption
I.

Introduction.
An arbitration was heard by a three-member panel: two were party-appointed and

one chairman whom the other two selected. The panel has held three hearings and
rendered three separate awards. Because one arbitrator did not disclose his decade-long
extensive business relationship with an affiliate of the party appointing him, the awards
must be vacated.

2..

Background.
OOGC America LLC and Chesapeake Exploration, LLC., jointly own oil and gas

working interests in the Eagle Ford Shale of south Texas, and the Niobrara Shale in
northeastern Colorado. Under the development agreements, Chesapeake is the operator
and OOGC is the non-operator.
The parties dispute Chesapeake's contractual obligations to OOGC as they apply
to Chesapeake's affiliates and other companies that worked on the joint account. OOGC
and Chesapeake disagree about (a) whether some companies should be considered
affiliates, related parties, or third parties of Chesapeake under the terms of the
agreements, and

(b) if they are affiliates or related parties, whether they charged

excessive rates to the joint account in violation of those agreements.

3.

Arbitration.
In February

2.016,

OOGe filed an arbitration demand. The three-member

arbitration panel consisted of]. Robert Beatty, chosen by OOGe, D. Patrick Long,
chosen by Chesapeake, and Donald 1. Schultz.
The panel divided the arbitration into four hearings by topic. Three have been
held.
The first hearing addressed Chesapeake's obligation to disclose information to
OOGC about its conflicts of interest. It also covered Chesapeake's relationship with ITS
International, Inc., and other companies.
The second hearing discussed the charges of Chesapeake's affiliate, Nomac
Drilling, lie.
The third hearing covered the completion charges of Chesapeake's affiliates,
Performance Technologies, lie, and ITS International.
After the second and third hearings concluded, the panel entered a partial final
award on OOGe's damages claims for drilling and completion.
A fourth hearing scheduled for March 2.0 I 7 would have addressed Chesapeake's
breach of the competitive rate clause for its remaining affiliates, but in early January,
OOGe objected to Long's participation. OOGe says Long and the ITS board chairman,
Yong Siang Goh, have had a business and personal relationship for over ten years. Long
never disclosed this connection to ITS. It insists that Long heavily persuaded the other
panel members and has permanently tainted their judgment.
This court stayed the fourth hearing. OOGC moved to vacate the awards.

A.

ITS.

From

2.012.-2.014,

ITS was a primary affiliate of Chesapeake. In July

2.016,

Chesapeake moved for partial summary judgment seeking a preliminary ruling from the
panel. It argued that ITS should not be classified as an affiliate under the development
agreements - a company is considered an affiliate by its power to control because of the
"Asian Consortium" - led by T emasek Holdings - that controls FTS.
In response, OOGe says Chesapeake materially influenced the ITS board of
directors. It produced a photograph of the board of directors identifying board chairman,

Goh, Domenic]. Dell'Osso, Jr., and Chesapeake vice president, Bryan Lemmerman.
Goh is also a senior director for T emasek.

B.

Affiliates Hearing.

At the request of Chesapeake, the panel expanded the affiliates hearing to discuss
the affiliate status of ITS. It determined that Chesapeake breached the development
agreement but denied OOGC's equitable relief. In short, the agreements define affiliate
as any person that directly or indirectly controls, is controlled by, or is under common
control with the first person or entity. There is also a common sense definition of
affiliate - one person or entity has a material interest in another. The panel concluded
that the Asian Consortium and T emasek Holdings controlled ITS; it was not and is not
an affiliate of Chesapeake under the agreements nor common sense.

Evident Partiali~.

4.

Evident partiality is when an arbitrator does not disclose facts that create a
reasonable impression of bias. I Long was required to disclose his relationships or
circumstances that would lead a reasonable, disinterested person to question his
impartiality. When he claimed that he did not have professional or social connections
with the parties or witnesses, he lied.
Long's evident partiality, however, was discovered when OOGC came across data
establishing that he knowingly did not share that he had numerous interests with ITS
and Chesapeake - specifically, the long, complex, and substantial business relationship
he has had with Goh, the board chairman of one of Chesapeake's primary challenged
affiliates. 2
An arbitrator must also continue to check for conflicts and disclose them
throughout his service. Long had several opportunities to be candid. Instead, he

19

U.S.C.A Sec.

lo(a) (2); Commonwealth Coatings Corp.v. Continental Casual~ Co., 393

U.S. 145, 147 (19 68 ).
2

American Arbitration Association, Rule-17(a) Disclosure.

continuously withheld that information. During the third hearing, Long asserted that
he only represented one oil and gas company. He did not mention ITS or Goh.

5.

Relationship.
Long and Goh were officers, co-managers, investors, and partners in at least six

businesses over the last ten years:

Business

Long's Position

Goh's Position

Beta Capital Group, liC
Owner and Manager
------------------------------------------ --------------------Beta GPS Trading, liC
Manager

-------------------

Owner

Aegis Services Company, liC
Vice President
------------------------------------------ --------------------North American Technologies Group, Inc.
Owner and CEO

-------------------

Manager

------------------------------------------ --------------------- -------------------

------------------------------------------ --------------------Beta Business Development, liP
Director

CEO

Owner

------------------Vice President

------------------------------------------ --------------------- ------------------Sponsor Investments, liC

Partner

Partner

In addition to these business connections, Long did not disclose that in

2015,

he had represented ITS as a lawyer. Jolene Goh, the daughter ofYong Siang Goh, also
worked as an attorney at Long's firm. She now works with her father for T emasek
Holdings, a client of the firm. He had a working relationship with ITS's deputy general
counsel, Jennifer Keefe - a former partner at his firm.
OOGC

also discovered that Long may have an undisclosed relationship with

Chesapeake through his ownership in Beta Shale,

ue. The

company holds mineral

interests in the same pooling unit as Chesapeake in Oklahoma. Further, Beta Shale has
the same address as Sponsor Investments, UC - a company with Goh as a partner.
In its investigation to disqualify Long, the American Arbitration Association
asked him twice to make specific disclosures about his business and personal
relationships. He gave vague, incomplete, evasive answers, and he narrowly formed his

responses to avoid fully sharing his extensive businesses. Long was not candid; he failed
to disclose the truth.

Long intentionally and continually hid his business connections. Because of his
perfidy, he was put in a position to decide whether (a) his former client should be
considered an affiliate, and (b) if Chesapeake had breached its contractual obligations
to OOGe.

6.

Conclusion.
Long knew he had to disclose his business connections. Instead, for eleven

months, he lied and hid his complex history of investments and relationships with
companies and people associated with Chesapeake from OOGe and the AAA.
Even when his deceit became known to OOGe and the American Arbitration
Association, he deliberately evaded their inquiries. Worse, Chesapeake knew of Long' s
deceit and failed to disclose the information to OOGe. Chesapeake is just as culpable as
Long. When the chairman of a three'person panel is corrupt with respect to the
substance of the case before it, he cannot reasonably be thought not to have influenced
the others. Because Long influenced his other panel members and probably affected the
outcome of the arbitration, the awards will be vacated.
Signed on December

5

,20r8, at Houston, Texas.

Lynn N. Hughes
United States Districtludge

'5'