lance armstrong does not want to pay sca $10 million

8/9/2019 Lance Armstrong Does Not Want to Pay SCA $10 Million

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CAUSE NO. DC13-01564

SCA PROMOTIONS, INC.,

Plaintiff,

§

§

§

IN THE DISTRICT COURT OF

v. §§

§

DALLAS COUNTY, TEXAS

LANCE ARMSTRONG, TAILWIND

SPORTS, INC., AND WILLIAM

STAPLETON,

Defendants.

§

§

§

§

§ 116TH JUDICIAL DISTRICT

DEFENDANTS LANCE ARMSTRONG TAILWIND SPORTS CORP.’S

MOTION TO VACATE FINAL ARBITRATION AWARD

Defendants Lance Armstrong and Tailwind Sports Corp. (improperly sued as “Tailwind

Sports, Inc.”) file this motion to vacate a final arbitration award issued February 4, 2015 in favor

of Plaintiff SCA Promotions, Inc. Defendants respectfully show:

I. SUMMARY

1. On February 4, 2015, in a split decision, a panel of arbitrators issued “sanctions”

in the amount of $10 million against Tailwind Sports Corp. and Lance Armstrong. The award

explicitly returns to SCA $7,500,000 in settlement consideration, together with “fees and costs in

excess of $2,000,000” and “additional costs insusceptible of precise calculation.”1 The

“sanction” award effectively eviscerated a fully negotiated and binding settlement agreement,

and a final, agreed, confirmed arbitration award based on that settlement agreement, which fully

and finally resolved the parties’ disputes over nine years ago. SCA’s president has repeatedly

confirmed that the settlement was intended to end the dispute.2 The Settlement Agreement states,

among other things, the following:

1 Exhibit K at 17.2 See, e.g., Exhibit J at 81-83, 113.

DALLAS

5/4/2015 6

FELI

DISTRI


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DEFENDANTS’ MOTION TO VACATE FINAL ARBITRATION AWARD 2

a) it is “fully and forever binding on THE PARTIES, and their heirs, executors,

administrators, successors and assigns”;

b) all parties expressly waived any right to “challenge, appeal, or attempt to set aside

the Arbitration Award”;

c) all parties expressly agreed that “[n]o promise or representation of any kind has

been made to any Party or to anyone acting for a Party except as is expressly

stated in this SETTLEMENT AGREEMENT, and THE PARTIES execute this

SETTLEMENT AGREEMENT without reliance on any representation of any

kind or character not expressly stated in this SETTLEMENT AGREEMENT”;

d) the Parties were “fully informed of the terms, contents, conditions, and effect of

the AGREEMENT”; and

e) the Parties “received independent legal counsel and advice before agreeing to the

terms of this AGREEMENT.”3

2. There were sound reasons for SCA entering into the agreement to settle, including

the Confidentiality Agreement, which protected the panel’s finding that SCA had engaged in the

unauthorized business of insurance from disclosure to the Texas Department of Insurance—an

entity that could have instituted actions against SCA itself and shut down SCA’s business. That

finding subjected SCA to potential liability of over $22 million, not to mention penalties

associated with the many years of SCA’s legal violations. Texas law provides that (1) an

unlicensed insurer can have a retroactive penalty imposed up to $10,000.00 for each day of

violation, and (2) an insurer may be enjoined from continuing the violation. The Texas Insurance

Code makes it clear that SCA’s unauthorized practice of insurance is a third degree felony. T EX.

I NS. CODE § 101.106; see TEX. PEN. CODE § 12.34.

3. SCA cast its claim in arbitration as a request for sanctions for one simple reason:

SCA cannot establish a valid ground to vacate the prior, confirmed arbitration award it

3 Exhibit B at 3.


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voluntarily agreed to so it could avoid substantial exposure from its own illegal conduct. But

SCA’s strategy invited a new problem: the arbitration panel had no power to issue a sanctions

award after the settlement and the final arbitration award (which was confirmed) because there

was no agreement to arbitrate covering this claim, only a court can vacate a prior confirmed

arbitration award, and the doctrine of functus officio ended the arbitration panel’s jurisdiction

nearly a decade ago. Thus, the Award not only exceeded the panel’s authority, but was beyond

the scope of any agreement between the parties. Moreover, the panel’s issuance of sanctions at

this late juncture violates well-established Texas public policies, which favor settlements and

arbitrations for efficient and final resolution of disputes, finality of judgments, and the right of

corporations to wind up their businesses. This “sanctions” order is unprecedented and

insupportable under Texas law. For these reasons, the award must be vacated.

II. EVIDENCE IN SUPPORT OF MOTION

4. Hearings on motions to vacate arbitration awards are evidentiary in nature, and

Defendants respectfully request an evidentiary hearing in this matter.4 In addition to any exhibits

and live testimony to be offered at the hearing, Defendants attach the Affidavit of Roni Wilson

and the following attached exhibits as support for this motion:

Exhibit A SCA Promotions, Inc.’s Motion to Reconvene Arbitration andRequest for Sanctions and Forfeiture Against Claimants datedJune 10, 2013

4 “[A]pplications to confirm or vacate an arbitration award should be decided as other motions in civil cases;

on notice and an evidentiary hearing if necessary.” Crossmark, Inc. v. Hazar , 124 S.W.3d 422, 430 (Tex. App.— Dallas 2004, pet. denied). Defendants attach relevant evidence to this motion for the Court’s review; however, the

complete arbitration transcript and exhibits are so voluminous that it impossible to submit the complete record

through the electronic filing system. Accordingly, Defendants intend to admit the complete record into evidence at

the hearing in a format that will be readily usable and easily reviewed. Defendants respectfully request anevidentiary hearing on this motion.


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Exhibit B Compromise Settlement Agreement dated February 8, 2006(SCA Arbitration Exhibit 51)

Exhibit C Final Arbitration Award dated February 8, 2006 (SCAArbitration Exhibit 52)

Exhibit D Partial Final Award on Jurisdiction dated October 29, 2013

Exhibit E Concurrence in Part and Dissent from Partial Final Award onJurisdiction dated December 17, 2013

Exhibit F Interim Award Determining the Issue of “Business of Insurance”dated November 23, 2005 (Armstrong/Tailwind ArbitrationExhibit 12A)

Exhibit G Contingent Prize Contract #31122 (Armstrong/TailwindArbitration Exhibit 10A)

Exhibit H Tailwind Sports Corp.’s Verified Plea to the Jurisdiction andAlternative Plea in Abatement in Cause No. D-1-GN-13-000761, Acceptance Insurance Co. v. Armstrong et al., and AttachedAffidavit of Laura Hundley Ritts (Armstrong/TailwindArbitration Exhibit 25A)

Exhibit 1: Certificate of Dissolution and Vote of Stockholders

Exhibit 2: Liquidating Trust Agreement

Exhibit I Transcript of arbitration hearing September 4, 2014

Exhibit J Transcript of arbitration hearing September 5, 2014

Exhibit K Final Arbitration Award dated February 4, 2015

Exhibit L Agreed Order Authorizing Deposit Into Registry of the Courtdated October 4, 2004 (SCA Arbitration Exhibit 44)

Exhibit M Order Abating and Administratively Closing Case dated July 29,

2005 (Armstrong/Tailwind Arbitration Exhibit 11A)Exhibit N Claimants' Response To The Panel's Questions Regarding

Attorneys' Fees And Damages dated February 3, 2006(Armstrong/Tailwind Arbitration Exhibit 33A)

Exhibit O Claimants’ Motion to Require Deposit of Security datedFebruary 3, 2006 (Armstrong/Tailwind Arbitration Exhibit 14A)


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Under this contract, SCA indemnified Tailwind for certain incentives under an employment

agreement between Tailwind and Armstrong—namely, performance awards tied to the Tour de

France.8

6. A dispute arose regarding SCA’s obligations under the Contingent Prize Contract.

As acknowledged in Plaintiff’s Original Petition, this dispute was previously the subject of a

legal proceeding in the 298th District Court of Dallas County, in Cause No. 04-9557, Armstrong

and Tailwind Sports, Inc. v. SCA Promotions.9 In that proceeding, SCA alleged that Armstrong

cheated in connection with the 2002, 2003, and 2004 Tour de France races by using

performance-enhancing drugs (“PEDs”).

10

As such, SCA claimed it was not required to honor

the insurance contract.11

7. On October 4, 2004, through an agreed order, SCA deposited $5,000,000 into the

registry of the 289th District Court.12 The case was sent to arbitration under the TAA, and the

298th District Court issued an order abating and administratively closing the case pending the

final outcome of the arbitration proceeding.13 That order provided that no further actions could

take place until the case was returned to active status and created a thirty-day window to reopen

the case after a final decision from the arbitrators.14

8. An arbitration proceeding commenced with Armstrong and Tailwind as claimants

and SCA as respondent.15 The arbitration panel consisted of Richard D. Faulkner, Richard

8 See id. 9

See Plaintiff’s Original Petition at 9, 13-14. 10 Id. at 2-6, 8.11 Id. 12 Exhibit L.13 Exhibit M.14 Id.15 See Plaintiff’s Original Petition at 9, 14; see also Exhibit G ¶ 9. Though not a party to the prior proceeding,

Defendant William Stapleton was Tailwind’s CEO and served as its corporate representative during the arbitration.See Plaintiff’s Original Petition at 10, 18. Because the arbitrators did not attempt to assume jurisdiction overStapleton in the reconvened proceeding, he has not joined in this motion. See Exhibit K at 8-9.


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Contract.24 Accordingly, even if the arbitrators had ruled in 2006 that Armstrong used PEDs and

had misrepresented that fact, the arbitrators could nevertheless have ordered SCA to pay

Tailwind for its loss.25

11. On November 23, 2005, after hearing evidence, the arbitration panel issued its

“Interim Award Determining the Issue of ‘Business of Insurance.’”26 The panel determined, with

one arbitrator dissenting, that SCA was “engaged in the ‘business of insurance’ in their

transactions with Claimant, Tailwind Sports, Inc., and Contingent Prize Contract Number 31122

is a contract of insurance under Texas law.”27 But because of the confidentiality order in place

and its prior orders, the arbitration panel held that “nothing in this decision is intended to or

should be utilized to influence or predetermine any possible agency consideration should these

issues ever be subsequently addressed.”28

12. Thus, SCA reaped a substantial benefit from the arbitration panel’s confidentiality

rulings: the arbitrators’ determination that SCA was violating the Insurance Code would be

shielded from public and Texas Department of Insurance scrutiny, allowing SCA to avoid the

civil and criminal penalties raised by Tailwind and Armstrong as well as a host of problems with

its insureds and reinsurers.29

13. In accordance with the Interim Award, Tailwind and Armstrong asked the Panel

to require that SCA post a bond.30 Tailwind and Armstrong, pursuant to the Texas Insurance

24 See Exhibit N at 6.25 See id .26 Exhibit F.27 Id. 28 Id. 29 See id.; see also Exhibit N at 7 (asserting that “[t]he day after Armstrong won the 2004 Tour de France and

Tailwind’s liability was clear, SCA filed its own claim based on Armstrong winning the Tour de France. SCA filed

that claim with PIL, its reinsurer , who paid SCA 1.2 Million dollars on that claim.”).30 Exhibit O (citing TEX. I NS. CODE § 101.353).


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18. Moreover, by their express admissions, the parties made it crystal clear that the

testimony or pleadings in the underlying matter played no part whatsoever in the decision to

settle the case and that there was no provision or option for either party to later change its mind

about the settlement or try to claw back the settlement consideration, no matter what the

circumstances or allegations.42 By settling the arbitration proceedings, SCA gave up its claims

against Armstrong, but it also avoided substantial liability and potential penalties for engaging in

unauthorized insurance practices.

19.

The Settlement Agreement provided that part of the settlement amount would be

paid from funds SCA had previously deposited into the 298th District Court’s registry.

43

On

February 9, 2006, after causing the arbitration panel to render the award, SCA, Tailwind, and

Armstrong submitted a joint, agreed order to the 298th District Court providing that SCA’s funds

in the court’s registry would be transferred to Tailwind.44 The agreed order stated that the court

found that the “transfer and assignment” of the registry funds to Tailwind was “appropriate.”45

20. In light of the previous agreement to maintain the funds in the 298th District

Court’s registry until the arbitration concluded in one party’s favor, this agreed order releasing

the funds to Tailwind notified the court that the arbitration was concluded and jointly asked the

court to approve and effectuate the award.46 Because the award was agreed, SCA did not move to

modify or vacate the Final Arbitration Award under the TAA within 90 days after the award.47

42

See generally Exhibit B.43 Id.44 Exhibit P.45 Id.46 Id.; Exhibit L.47 See TEX. CIV. PRAC. & R EM. CODE § 171.054 (allowing arbitrators to modify or correct award on limited

grounds on application filed “not later than the 20th day after the date the award is delivered to the applicant”); id . §

171.088 (authorizing application for court to vacate arbitration award “not later than the 90th day after the date of

delivery of a copy of the award to the applicant”); id . § 171.091 (authorizing application for court to modify awardon limited grounds within 90 days); see also Exhibit E.


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he never believed Armstrong during the prior arbitration proceeding, and still does not believe

him to this day. Yet he settled anyway.64

F. June 2013: After Defendants File Dispositive Motions, SCA Changes Course and

Asks the Arbitrators to Reconvene the 2006 Proceeding

29. Defendants Armstrong and Stapleton timely sought dismissal of this lawsuit under

Texas Rule of Civil Procedure 91a, which authorizes trial courts to dismiss a cause of action on

the grounds that it has no basis in law or fact.65 All Defendants also asserted pleas to the

jurisdiction based on SCA’s failure to plead a valid ground for vacating the arbitration award,

this Court’s lack of jurisdiction to vacate a confirmed arbitration award, and other grounds.

These motions remain pending before the Court.66

30. Rather than respond to any dispositive motion, SCA changed strategies and asked

the arbitrators to “reconvene” the prior arbitration proceedings.67 In doing so, SCA attempted to

cherry-pick the theories it wanted to arbitrate, intending to reserve some of its claims for this

lawsuit. See id. at 2-3.68 Specifically, in the reconvened arbitration, SCA limited its claims to: (1)

a request that the arbitration panel sanction Armstrong and Tailwind; and (2) a request for

“forfeiture” of “prize money” paid by SCA based on the USADA Reasoned Decision.69

64 Exhibit J at 74, 88-90.65 See TEX. R. CIV. P. 91a; see Defendants Lance Armstrong and William Stapleton’s Rule 91a Motion toDismiss, on file.66 See Defendants Lance Armstrong and William Stapleton’s Plea to the Jurisdiction, on file; Defendant

Tailwind Sports Corp’s Joinder to Defendants Lance Armstrong and William Stapleton’s Plea to the Jurisdiction, on

file.67 See Exhibit A.68 In fact, during the arbitration, SCA indicated that is exactly what it intends to do. SCA’s counsel stated:

“Step one is we are here before the Panel to seek sanctions and forfeiture based on Mr. Armstrong’s outrageous

conduct and USADA's ruling, which stripped him of his title, which was a precondition for him to be owed any bonus, prize or award money. And, of course, step two is proceed with our court challenge for any remaining aspects

we have of the case. We filed the court challenge first because there was time limits and then we referred out the

various matters of the arbitration to this Panel, the procedural part. So there remains a lawsuit pending in Dallas

State District Court Tonya Parker." See Exhibit I at 35.69 Exhibit A.


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31. Defendants objected to reconvening the arbitration.70 Nevertheless, on October

29, 2013, two of the three arbitrators issued a Partial Final Award on Jurisdiction declaring their

intent to assert jurisdiction and issue another final award.71

(The majority’s reasoning is

incorporated into the final award, which is addressed fully below.). One arbitrator dissented and

would have held that the arbitration panel lacked jurisdiction to reconvene the arbitration. 72

G. This Court Refuses to Stay the Arbitration

32. Tailwind and Armstrong brought separate motions, and later amended motions, to

stay the re-convened proceeding under TAA section 171.023 and to vacate the panel’s partial

award on jurisdiction.

73

This Court heard the amended motions on February 21, 2014.

33. In an order signed on February 25, 2014 and transmitted to the parties the next

day, the Court denied Defendants’ motions without stating any grounds, and later issued findings

of fact and conclusions of law.74 The Dallas Court of Appeals refused review of the partial award

on jurisdiction, finding that it lacked jurisdiction over the interlocutory appeal, and it denied

Defendants’ request for a mandamus.75

70 Exhibits Q, R.71 See Exhibit D, E. The Partial Final Award on Jurisdiction was transmitted to the parties via email on

October 30, 2013. See Exhibit D.72 Exhibit E.73 See Defendant Tailwind Sports Corp.’s Amended Motion to Stay Arbitration Proceedings and Alternative

Motion to Vacate Partial Final Award on Jurisdiction, on file; Defendant Lance Armstrong’s Amended Motion to

Stay Arbitration Proceedings and Alternative Motion to Vacate Partial Final Award on Jurisdiction, on file.74 See Order dated February 25, 2014, on file; Findings of Fact and Conclusions of Law dated March 19,

2014, on file. 75 Armstrong v. SCA Promotions, Inc., No. 05-14-00300-CV, 2014 WL 1678988 (Tex. App.—Dallas Apr. 24,

2014, no pet.) (mem. op.); In re Tailwind Sports Corp., No. 05-14-00252-CV, 2014 WL 1678962 (Tex. App.— Dallas Apr. 24, 2014, orig. proceeding) (mem. op.).


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H. The Arbitration Proceeds Over Defendants’ Objection, and the Panel Issues an

Unprecedented $10 Million Sanctions Award

34. Over Armstrong and Tailwind’s repeated objections, the arbitration hearing took

place over the course of two days in September 2014.

76

On February 4, 2015, the panel issued its

decision.77

35. Two members of the panel voted to award sanctions in the amount of $10 million

against Armstrong and Tailwind.78 The majority noted four issues for its consideration: (1) did

the panel have jurisdiction or authority to decide and resolve the disputes between the parties?;

(2) which parties were properly subject to the panel’s jurisdiction?; (3) what jurisdiction does the

panel have to award sanctions?; and (4) if sanctions are appropriate, what sanctions should be

awarded?79

36. Initially, the majority held that the issue of its jurisdiction would be determined

based on the Compromise Settlement Agreement and Defendants’ prior pursuit of claims against

SCA after the 2006 arbitration.80 The majority noted its prior partial final award on jurisdiction,

and held that the partial award was “further supplemented by the jurisdictional findings and

conclusions of this Final Award on the merits.”81

37. The majority then addressed the proper parties to the arbitration.82 It held that the

arbitration provision in the Compromise Settlement Agreement granted the panel the “exclusive

authority to interpret and define its own jurisdiction,” and that Armstrong and Tailwind are

“further estopped by the language they agreed to from legitimately claiming otherwise as they

76 Exhibit I at 8; Exhibits J, Q, R; see also Exhibit K at 2 (noting objection to the Tribunal’s jurisdiction).77 Exhibit K.78 Id.79 Id. at 2, 5.80 Id. at 6.81 Id. at 7.82 Id. at 7-8.


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affirmatively waived the jurisdictional challenge they now attempt.”83 The majority stated that its

jurisdiction under the language of the Compromise Settlement was “further buttressed by

Claimants’ own subsequent actions,” referring to the requests for relief by Armstrong and

Tailwind after the conclusion of the 2006 arbitration.84 While the majority recognized that

arbitration Tribunals have “no roving commission to determine or vindicate public policy,” and

did not purport to assert it did, the majority found that “arbitration Tribunals must have the

authority to regulate, control and, if necessary, sanction parties for conduct in connection with

the proceedings before them.”85

38.

The majority, however, confirmed that it had no jurisdiction over William

Stapleton, as he acted in a disclosed capacity as merely a corporate officer of Tailwind or as

Armstrong’s agent.86 Stapleton did not agree to any jurisdiction of the panel, and accordingly,

the majority refused to consider SCA’s request for sanctions against Stapleton.87 It found that the

documents in evidence showed that Tailwind, Armstrong, SCA Promotions, Inc., and SCA

Insurance Specialists, Inc., were parties to the Contingent Prize Contract and the Compromise

Settlement Agreement and “agreed directly, or by authorized agent, to arbitrate any disputes

between any or all of them before this Tribunal, as defined in these agreements.”88

39. Next, the majority rejected the application of the functus officio doctrine and held

its jurisdiction was not extinguished under that doctrine.89 The majority opined that “[t]he claims

at issue now are but the newest set of disputes between these parties and ones substantially

83 Id. at 8.84 Id.85 Id.86 Id.87 Id. at 9.88 Id.89 Id.


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implied covenant that parties must not “frustrate or impede” any other parties’ performance of a

contract.100 It held that Armstrong and Tailwind improperly prevented SCA from performing its

duties under the parties’ contracts and agreements to arbitrate, and intentionally breached their

obligations to arbitrate their disputes with SCA, by breaching an obligation of parties in

arbitration to “be truthful, to not commit perjury and to not intentionally submit fraudulent

evidence in arbitration of their disputes.”101

44. Additionally, though the panel never made a determination on the merits in the

prior arbitration, the majority opined that Armstrong and Tailwind impeded the panel’s

performance by presenting false evidence.

102

The majority held that the arbitration agreement

imposed duties on the parties and the arbitrators, and the breach of the obligation to arbitrate can

lead to damages.103

45. Next, the majority held that the evidence established that Armstrong and Tailwind

admitted the sanctionable conduct in substantial part, and it assessed sanctions in the amount of

$10,000,000.104 The majority rejected Tailwind’s assertion that it was dissolved and not in

existence, and therefore, there was no jurisdiction to sanction the dissolved entity.105 Rather, it

held that was an issue of enforcement of the final award.106 Thus, Tailwind was subjected to the

sanctions as well.

46. In his concurrence and dissent, Arbitrator Senator Lyon agreed that the panel had

no jurisdiction over Stapleton, but disagreed that the panel had authority to issue a sanctions

100 Id.101 Id. at 15-16 (citing Owens v. Withee, 3 Tex. 161 (1848); Brown v. Eubank, 443 S.W.2d 386 (Tex. Civ.

App.—Dallas 1969, no writ); Standard Fire Ins. Co. v. Fraiman, 588 S.W.2d 681 (Tex. App.—Houston [14th Dist.]

1979, writ ref’d n.r.e.)). 102 Id. at 16.103 Id.104 Id. at 17-18.105 Id. at 18.106 Id.


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The amount of the sanction is almost exactly that which SCA paid to settle withClaimants and what SCA paid in attorney’s fees and costs. To say that this is asanction when it mirrors almost exactly what SCA paid is incorrect. In substance,the majority’s sanction is an unwarranted, unlawful reversal of a settlementagreement that was made and effectuated nine years ago. There is an old saying

that if it looks like a duck, walks like a duck and quacks like a duck, it’s a duck.This is a duck and it is no more or less than SCA trying to overturn an agreementSCA voluntarily entered into in February 2006 to get its money back becauseArmstrong lied about performance enhancing drugs in the 2005-2006 proceedings.115

49. In closing, Senator Lyon opined that (1) the panel had no jurisdiction over

Stapleton, (2) the panel had no jurisdiction over Tailwind as a result of the dissolution, and (3)

the panel exceeded its authority by awarding sanctions.116 Furthermore, the panel’s decision

violates Texas public policy by “(1) frustrating the policy of our law favoring voluntary disputes;

(2) rendering irrelevant disclaimers of reliance; and (3) substituting international precedent for

governing law.”117

50. This motion to vacate ensued. SCA has not moved to confirm the award in this

proceeding, as required by Texas Civil Practice and Remedies Code section 171.096, but has

filed suit in a separate action. See TEX. CIV. PRAC. & R EM. CODE § 171.096(d) (“Consistent with

Section 171.024, if a proceeding is pending in a court relating to arbitration of an issue subject to

arbitration under an agreement before the filing of the initial application, a party must file the

initial application and any subsequent application relating to the arbitration in that court.”).

IV. ARGUMENT AND AUTHORITIES ON MOTION

TO VACATE ARBITRATION AWARD

A. Grounds for Vacating an Arbitration Award

51. The Texas Arbitration Act (“TAA”) and the Texas common law govern this

Court’s review of final arbitration awards. CVN Grp., Inc. v. Delgado, 95 S.W.3d 234, 245 (Tex.

115 Id. at 24.116 Id. at 24.117 Id. at 25.


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171.088(a)(4).119 The arbitration panel’s award of sanctions should be vacated—the arbitrators

exceeded their authority by issuing sanctions that were not authorized by the parties’ agreements

to arbitrate. Furthermore, the arbitrators exceeded their authority because in proceedings under

the TAA, only a court can vacate a prior arbitration award—but the panel essentially did just

that. Moreover, the arbitrators exceeded their authority under the doctrine of functus officio,

pursuant to which their authority expired years before SCA sought to reconvene the arbitration.

53. In addition to the statutory grounds, a trial court can vacate an arbitration award

on public policy grounds “in an extraordinary case in which the award clearly violates carefully

articulated, fundamental policy.” CVN Group, Inc., 95 S.W.3d at 245. Defendants ask the Court

to vacate the arbitration award because it violates Texas public policy. Specifically, by

reconvening an arbitration years after its final resolution through a binding settlement agreement

and agreed final arbitration award, and awarding “sanctions,” the award violates the following

well-established Texas public policies:

• The public policy in favor of settlement of disputes;

• The public policy in favor of finality of arbitration awards, including enforcing

confirmed arbitration awards, and the use of vacatur by a court of law as the sole

method of setting aside a final arbitration award;

• The public policy in favor of allowing corporations to dissolve and wind up their

affairs.

119 In fact, SCA expressly argued to the Dallas Court of Appeals that post-arbitration review would be allowedunder these provisions of the TAA. See Exhibit X at p. 10-18.


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B. The Arbitrators Exceeded Their Powers

1. Standards of Review and Governing Law

54. “Arbitrators exceed their power when they decide matters not properly before

them.” Townes Telecommc’ns, Inc. v. Travis, Wolff & Co., L.L.P. , 291 S.W.3d 490, 493-94 (Tex.

App.—Dallas 2009, pet. denied). Arbitrators’ authority derives from the arbitration agreement.

Id. When an arbitration panel “departs from the agreement and, in effect, dispenses its own idea

of justice,” the award is unenforceable. Id.

55. Texas law strongly favors arbitration. See Cantella & Co. v. Goodwin, 924

S.W.2d 943, 944 (Tex. 1996) (per curiam); Phillips v. ACS Mun. Brokers, Inc., 888 S.W.2d 872,

875 (Tex. App.—Dallas 1994, no writ). However, “[a] party cannot be required to arbitrate

unless it has agreed to do so.” Kilroy v. Kilroy, 137 S.W.3d 780, 785 (Tex. App.—Houston [1st

Dist.] 2004, no pet.) (internal quotations omitted); see Roe v. Ladymon, 318 S.W.3d 502, 512

(Tex. App.—Dallas 2010, no pet.) (“[A]rbitration, being a matter of contract, is ‘a way to resolve

those disputes—but only those disputes—that the parties have agreed to submit to arbitration.’”

(quoting First Options of Chicago v. Kaplan, 514 U.S. 938, 943, 115 S.Ct. 1920 (1995))).

56. To determine whether the arbitrators exceeded their authority, the Court must

determine whether an agreement to arbitrate exists between the parties, and whether the claims

asserted fall within the agreement’s scope. See Gables Cent. Const., Inc. v. Atrium Cos., Inc., No.

05-07-00438-CV, 2009 WL 824732, at *2 (Tex. App. — Dallas Mar. 31, 2009, pet. abated);

Dennis v. Coll. Station Hosp., L.P., 169 S.W.3d 282, 285 (Tex. App. — Waco 2005, pet. denied);

Phillips, 888 S.W.2d at 875; L&L Kempwood Assocs., L.P. v. Omega Builders, Inc., 972 S.W.2d

819, 820-821, 825 (Tex. App.—Corpus Christi 1998, orig. proceeding), mand. granted on other

grounds, In re L&L Kempwood Assocs., Inc., 9 S.W.3d 125 (Tex. 1999).


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57. “Arbitration agreements are interpreted under traditional contract principles.”

J.M. Davidson, Inc. v. Webster , 128 S.W.3d 223, 227 (Tex. 2003). The court’s primary concern

is to ascertain the parties’ true intentions as expressed in the instrument. Id . To do so, the court

must examine and consider the entire writing in an effort to harmonize and give effect to all its

provisions. Id . No single provision is giving controlling effect; instead, all provisions must be

considered with reference to the whole instrument. Id .

58. Whether a claim falls within the scope of an arbitration clause is a question of

law. BDO Seidman, LLP v. J.A. Green Dev. Corp., 327 S.W.3d 852, 854 (Tex. App.—Dallas

2010, no pet.). Doubts about the scope of an arbitration agreement are ordinarily resolved in

favor of coverage. In re D. Wilson Const. Co., 196 S.W.3d 774, 782 (Tex. 2006). However, the

policy favoring arbitration is not without limits; it cannot support stretching a contractual clause

beyond the parties’ intended scope or disregarding plain and unambiguous provisions in the

agreement. Burlington Resources Oil & Gas Co., L.P. v. San Juan Basin Royalty Trust , 249

S.W.3d 34, 44 (Tex. App.—Houston [1st Dist.] 2007, pet. denied); McReynolds v. Elston, 222

S.W.3d 731, 740 (Tex. App.—Houston [14th Dist.] 2007, no pet.).

59. For arbitrations conducted in accordance with the TAA, courts—not arbitrators—

are the only forum that can be used to modify a prior final arbitration award when more than 20

days have passed since delivery of the award. Section 171.054 allows arbitrators to modify or

correct award on limited grounds only upon an application filed “not later than the 20th day after

the date the award is delivered to the applicant.” TEX. CIV. PRAC. & R EM. CODE § 171.054.

Thereafter, a party is limited to challenging the award through a motion to vacate, which must be

filed within 90 days after delivery of a copy of the award to the applicant. Id . § 171.091

(authorizing application for court to modify award on limited grounds within 90 days). When an


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arbitration panel modifies an award on grounds not provided by the statutes and outside the time

limits provided in the TAA, the modified award exceeds the arbitrators’ power and must be

vacated. Barsness v. Scott , 126 S.W.3d 232, 241 (Tex. App.—San Antonio 2003, no pet.).

2. Arbitrators’ Authority Does Not Arise from Any “Inherent Powers” or From

Silence in the Arbitration Agreement, But From the Express Terms of the

Arbitration Agreement

60. In Stolt-Neilsen SA v. AnimalFeeds International Corp., the United States

Supreme Court confirmed that an arbitrator’s power can only arise from the contract providing

the obligation to arbitrate, and the parties’ intent to allow certain procedures and remedies cannot

be implied from silence but must derive from the parties’ reasonable expectations as expressed in

the contract. 559 U.S. 662, 684-87 (2010).

61. In Stolt-Nielsen, the issue was whether the arbitrators had the authority to certify a

class action where both parties conceded that the contract providing for arbitration was silent on

the issue. Id. at 668-69, 676. The arbitrators determined that class arbitration could proceed. Id.

at 673-74. The Supreme Court noted that the arbitrators did not look to the governing law—in

that case, the Federal Arbitration Act (“FAA”), maritime, or New York law—to determine

whether any default rule allowed a class arbitration to proceed absent express consent. Id.

Instead, the arbitration panel “proceeded as if it had the authority of a common-law court to

develop what it viewed as the best rule to be applied in such a situation,” and it ruled based on its

perception that the “consensus” among arbitrators was that class arbitration should be

allowed. Id.

62. The Supreme Court vacated the arbitrators’ decision. Id. at 677. The Court held

that the FAA’s provisions show that the “central or primary purpose of the FAA is to ensure that

private agreements to arbitrate are enforced according to their terms.” Id. at 682 (internal


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quotations omitted). Courts, and arbitrators, are bound to determine the parties’ intent as

expressed in the contract, must construe the contract in accordance with the expectations of the

parties, and are bound by the limitations within the contract:

Whether enforcing an agreement to arbitrate or construing an arbitrationclause, courts and arbitrators must “give effect to the contractual rights andexpectations of the parties.” In this endeavor, “as with any other contract, the parties’ intentions control.” This is because an arbitrator derives his or her powersfrom the parties’ agreement to forgo the legal process and submit their disputes to private dispute resolution.

Underscoring the consensual nature of private dispute resolution, we haveheld that parties are “‘generally free to structure their arbitration agreements asthey see fit.’” For example, we have held that parties may agree to limit the issues

they choose to arbitrate, and may agree on rules under which any arbitration will proceed. They may choose who will resolve specific disputes.

We think it is also clear from our precedents and the contractual nature ofarbitration that parties may specify with whom they choose to arbitrate theirdisputes. It falls to courts and arbitrators to give effect to these contractuallimitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the exercise: to give effect to the intent of the parties.

Id. at 682-84 (citations omitted).

63.

Based on these bedrock principles, the Court held that “it follows that a party may

not be compelled under the FAA to submit to class arbitration unless there is a contractual basis

for concluding that the party agreed to do so.” Id. at 684. In other words, mere silence in an

arbitration agreement is not enough, and arbitrators—unlike courts—do not have the ability to

employ procedures that are not expressly agreed to by the parties. Id. Instead of looking to the

contract and the governing law, the arbitrators in that case erroneously assumed that because the

contract did not bar class arbitration, the arbitrators had power to implement it if they saw fit. Id.

The Court found this proposition to be “fundamentally at war with the foundational FAA

principle that arbitration is a matter of consent.” Id.


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64. The Court did recognize that “[i]n certain contexts, it is appropriate to presume

that parties that enter into an arbitration agreement implicitly authorize the arbitrator to adopt

such procedures as are necessary to give effect to the parties’ agreement.” Id. at 684-85. But it

went on to hold that the mere existence of an arbitration agreement does not authorize

procedures that would “change[] the nature of arbitration to such a degree that it cannot be

presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.”

Id.

65.

Applying these premises to class arbitration, the Court held that class arbitration,

in the absence of a specific agreement providing for it, would be antithetical to the general

expectations of parties to an arbitration agreement due to the nature of arbitration:

In bilateral arbitration, parties forgo the procedural rigor and appellate review ofthe courts in order to realize the benefits of private dispute resolution: lower costs,greater efficiency and speed, and the ability to choose expert adjudicators toresolve specialized disputes. But the relative benefits of class-action arbitrationare much less assured, giving reason to doubt the parties’ mutual consent toresolve disputes through class-wide arbitration.

Consider just some of the fundamental changes brought about by the shiftfrom bilateral arbitration to class-action arbitration. An arbitrator chosenaccording to an agreed-upon procedure no longer resolves a single dispute between the parties to a single agreement, but instead resolves many disputes between hundreds or perhaps even thousands of parties. Under the Class Rules,“the presumption of privacy and confidentiality” that applies in many bilateralarbitrations “shall not apply in class arbitrations,” thus potentially frustrating the parties’ assumptions when they agreed to arbitrate. The arbitrator’s award nolonger purports to bind just the parties to a single arbitration agreement, butadjudicates the rights of absent parties as well. And the commercial stakes ofclass-action arbitration are comparable to those of class-action litigation, eventhough the scope of judicial review is much more limited. We think that thedifferences between bilateral and class-action arbitration are too great forarbitrators to presume, consistent with their limited powers under the FAA, thatthe parties’ mere silence on the issue of class-action arbitration constitutesconsent to resolve their disputes in class proceedings.

Id. at 685-87 (citations omitted).


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66. Responding to the dissent, the Court dismissed that the question involved merely

what “procedural mode” was available to present the claims. Id. at 687. “If the question were that

simple, there would be no need to consider the parties’ intent with respect to class arbitration.”

Id. Instead, the Court held that “[c]ontrary to the dissent, but consistent with our precedents

emphasizing the consensual basis of arbitration, we see the question as being whether the parties

agreed to authorize class arbitration. Here, where the parties stipulated that there was ‘no

agreement’ on this question, it follows that the parties cannot be compelled to submit their

dispute to class arbitration.” Id.

67.

Along these lines, courts have rejected an arbitrator’s inherent authority to

sanction parties and instead looked only to the arbitration agreement to determine the arbitrator’s

power to sanction. See InterChem Asia 2000 Pte. Ltd. v. Oceana Petrochemicals AG, 373 F.

Supp. 2d 340, 359 (S.D.N.Y. 2005) (finding arbitrator exceeded his authority by issuing

monetary sanctions where agreement did not provide arbitrator with that authority or incorporate

rules of arbitration that authorized any such action, and rejecting inherent authority); Seagate

Tech., LLC v. W. Digital Corp., 854 N.W.2d 750, 761 (Minn. 2014) (no inherent authority);

Certain Underwriters at Lloyd's, London v. Argonaut Ins. Co., 264 F. Supp. 2d 926, 944–45

(N.D. Cal. 2003) (requiring express grant of authority before imposing punitive sanctions); MCR

of Am., Inc. v. Greene, 811 A.2d 331, 343–44 (Md. Ct. Spec. App. 2002). Cf. Chase Bank USA v.

Hale, 19 Misc. 3d 975, 980 (N.Y. Sup. Ct. 2008) (upholding sanction by arbitrator where NAF

arbitration rules authorized award and were incorporated into arbitration agreement by

reference).


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3. The Parties Did Not Agree to Allow the Arbitration to be Reopened Years

After the Final Award to Address Conduct that Occurred in the Initial

Arbitration

68. SCA has repeatedly contended that the Contingent Prize Contract and the

Settlement Agreement are silent as to the Panel’s ability to award sanctions.120 In the arbitration

proceeding, SCA attempted to distinguish Stolt-Nielsen on the basis that awarding sanctions does

not “fundamentally change” the entire arbitration process or the scope of the arbitration. SCA is

wrong—SCA’s request for sanctions does fundamentally alter the entire arbitration process and

the scope of arbitration as applied to this case. It also fundamentally changes the Settlement

Agreement from full and final to “partial and temporary,” thus rendering numerous provisions

meaningless.121 Therefore, to the extent SCA is correct that the contract is silent, Stolt-Nielsen

required the panel to refrain from granting sanctions. But SCA’s argument ignores express

provisions in the Settlement Agreement indicating that the parties intended to resolve the entire

dispute—not to leave it open indefinitely to allow SCA to later undo the settlement by recasting

its claims as a request for sanctions. In fact, Robert Hamman conceded that, as the decision-

maker for SCA, he intended the settlement to resolve the dispute.122

69. Texas law “has always favored the resolution of controversies through

compromise and settlement rather than through litigation[,] and it has always been the policy of

the law to uphold and enforce such contracts if they are fairly made and are not in contravention

of some law or public policy.” Cadle Co. v. Castle, 913 S.W.2d 627, 638 (Tex. App.—Dallas

1995, writ denied) (internal quotation omitted). Moreover, the Final Arbitration Award rendered

in accordance with the Compromise Settlement Agreement was the equivalent of a final

120 Exhibit V at 39-40. 121 Compare Exhibit K at 11 (finding that the parties intended a temporary cease fire), with Exhibit B at 2

(agreeing that the parties would not “challenge, appeal or attempt to set aside the award.”).122 Exhibit J at 81-83, 113.


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Davidson, Inc., 128 S.W.3d at 227. To follow this instruction, the court must consider the entire

document and give effect to all of its provisions, not just the arbitration clause. See id.

74. The Compromise Settlement Agreement provides for arbitration of disputes

among the parties “arising under or in connection with” the Agreement or the Contingent Prize

Contract.126 As Senator Lyon eloquently explained in his initial dissent from exercising

jurisdiction, SCA’s motion to reconvene the arbitration did not “arise under or in connection

with” the Agreement or the Contingent Prize Contract:

Courts have interpreted arbitration clauses that provide for arbitration of “any andall disputes arising under or in connection” with a contract, such as the arbitration

provision at issue in this case, as narrower in scope than an arbitration clause providing for arbitration of “any and all disputes between the parties.” See Tittlev. Enron Corp., 463 F.3d 410, 422 (5th Cir. 2006); Autonation USA Corp. v. Leroy, 105 S.W.3d 190, 197 (Tex. App.—Houston [14th Dist.] 2003, orig. proceeding); In re Conseco Fin. Serv. Corp., 19 S.W.3d 562, 570 (Tex. App.— Waco 2000, orig. proceeding).

If the facts alleged in support of the claim have a “significant relationship”to or are “factually intertwined” with the contract that is subject to the arbitrationagreement, the claim is within the scope of the agreement and is arbitrable. Dennis v. College Station Hosp., L.P., 169 S.W.3d 282, 285 (Tex. App.—Waco2005, pet. denied). If the facts alleged stand alone and are completely independentof the contract, the claim is not subject to arbitration. Pennzoil Co. v. Arnold OilCo., 30 S.W.3d 494, 498 (Tex. App.—San Antonio 2000, orig. proceeding). Todetermine whether a claim falls within the scope of an arbitration agreement, thePanel must look at the terms of the agreement and the factual allegations in the petition, rather than the legal causes of action. See In re Rubiola, 334 S.W.3d at223; Prudential Sec., Inc. v. Marshall, 909 S.W.2d 896, 900 (Tex. 1995).

The relief requested by SCA in its Motion to Reconvene Arbitration and Request for Sanctions and Forfeiture Against Claimants is not predicated on aclaim for breach of the CSA or a claim for fraudulent inducement in connectionwith the CSA. Instead, it asserts that fraudulent testimony in the 2006 litigationresulted in an improper award, and so the funds paid to Claimants pursuant to thataward should be returned to SCA. In addition, SCA requests sanctions for thefraudulent conduct as compensation for certain tort-based damages.

Since SCA’s legal claims are based solely on fraud alleged to haveoccurred during the 2006 arbitration proceedings, the dispute could be maintained

126 Exhibit B.


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without reference to the CSA or the CPS. Therefore, the dispute is not “arisingunder or in connection with” the CSA or CPC, and so does not fall within thescope of the arbitration provision at issue in this case.127

75. And viewed as a whole, the Compromise Settlement Agreement expresses a clear

intent to end any controversy between the signatories and limit future claims to those involving

performance of the Agreement itself. This intent is expressed in the following provisions:

• Consideration consisting of SCA’s lone remaining obligation under ContingentPrize Contract #31122—reimbursement of the bonus amount Tailwind owed toArmstrong after the 2004 Tour de France.

• Terms requiring payment of the balance within one year unconditionally and

without any withholding or offset, “regardless of the circumstances or any claim

made by Respondents, including any claims by Respondents that Claimants have breached this Agreement in any way.”

• “An Arbitration Award, signed by all three Arbitrators, ordering Respondents to pay to Claimants the sum of $7,500,000.00 shall be entered on or before February9, 2006.”

• Express language stating that “[n]o party may challenge, appeal or attempt to setaside the Arbitration Award.”

• The provision that the “SETTLEMENT AGREEMENT is fully and forever

binding on THE PARTIES, and their heirs, executors, administrators, successors,and assigns[.]”

• An express disclaimer of reliance: “No promise or representation of any kind has

been made to any Party or to anyone acting for a Party, except as is expresslystated in this SETTLEMENT AGREEMENT, and THE PARTIES execute thisSETTLEMENT AGREEMENT without reliance on any representation of anykind or character not expressly stated in this SETTLEMENT AGREEMENT. . . .”

• A strict merger clause: “THE PARTIES each acknowledge that this instrument

constitutes the entre agreement between them with respect to the matters beingcompromised and settled in this SETTLEMENT AGREEMENT, and that thisSETTLEMENT AGREEMENT supersedes any and all prior agreements andunderstandings relating to the subject matter hereof.”128

127 Exhibit E.128 Exhibit B.


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76. Accordingly, the only “dispute[s] or controvers[ies]” that could possibly “aris[e]

under or in connection with [the Compromise Settlement Agreement] or Contingent Prize

Contract #31122” were any breaches of express conditions of the Settlement Agreement, which

consisted of payment obligations, representations and warranties contained exclusively within

the Settlement Agreement, and confidentiality requirements. See In re Great W. Drilling, Ltd.,

211 S.W.3d at 840 (examining broad arbitration clause and holding that agreement defining

scope of parties’ duties under contract could not be reasonably interpreted as requiring

arbitration of claims clearly beyond those definitions and limitations).

77.

Contingent Prize Contract #31122 imposes no greater obligation to arbitrate. That

agreement provides in part: “[Tailwind] agrees that any dispute arising under this contract shall

be resolved by binding arbitration pursuant to the Texas General Arbitration Act.”129 Because the

Compromise Settlement Agreement supersedes Contingent Prize Contract #31122, no claim

against Armstrong or Tailwind can “arise under” or even “in connection with” Contingent Prize

Contract #31122. The Compromise Settlement Agreement’s plain effect was to cut off all claims

existing on February 8, 2006 and limit future claims to those relating to performance of the

Agreement. As such, neither of the arbitration clauses provided the arbitrators with the power to

issue sanctions.

78. The parties likewise did not incorporate any rules from an arbitration organization

that would have allowed for the issuance of sanctions. The fact that some arbitration rules

authorize sanctions during a proceeding does not help SCA, as all the major arbitration

organizations’ rules supply no authority for reopening or revisiting a prior arbitration for that

purpose after an arbitration award is final. Instead, as the rules uniformly provide, an arbitrator

may not reopen an arbitration hearing after making an award. See American Arbitration

129 Exhibit G.


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Association (“AAA”), Commercial Arbitration Rules 36, 46 (2009); see AAA, International

Arbitration Article 24 (2010); see JAMS, Comprehensive Arbitration Rules & Procedures

(“CARP”) Rule 22(i) (2010)). Once transmitted or served, an award is final and may only be

modified—in a short, prescribed time period—to correct computational, typographical, or other

similar errors. AAA, Commercial Arbitration Rule 46; AAA, International Arbitration Article

30; JAMS, CARP Rule 24(j) & (k). Accordingly, an arbitrator may not redetermine the merits of

any claim resolved by an arbitration after the award is final. See, e.g., AAA, Commercial

Arbitration Rule 46. And that is exactly what SCA is now asking the Panel to do.

79.

In short, this Court should look no further than the Compromise Settlement

Agreement to determine the arbitrators’ jurisdiction. To the extent the Agreement is silent on the

ability to award sanctions, Stolt-Nielsen and the parties’ general expectations arising in the

context of arbitration preclude any authority to render sanctions at this late stage. But even more

importantly, the Settlement Agreement’s provisions indicate an intent contrary to SCA’s

proposed implied powers purportedly arising from the Agreement’s silence—the provisions

indicate that the parties intended this settlement to be final, binding on the parties, forever waive

any rights to challenge the agreement or the resulting award, and expressly disclaimed any

reliance on representations or conduct that occurred in the arbitration. The Settlement Agreement

did not provide the Panel with authority to issue sanctions.

4. The Majority Did Not Have “Jurisdiction” to Determine Its Own

Jurisdiction,” and Could Not Create Jurisdiction Through an “Estoppel,

Laches, or Waiver” Theory.

80. The arbitration panel majority held that it could only have jurisdiction of parties

and issues affirmatively delegated to the panel, but held that the arbitration provision granted the


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87. An implied contract can arise from the parties’ acts and conduct. Harrison v.

Williams Dental Group, P.C., 140 S.W.3d 912, 916 (Tex. App.—Dallas 2004, no pet.). This type

of contract exists when the facts and circumstances surrounding the parties’ relationship imply a

mutual intention to contract. Id . Every contract requires a meeting of the minds, but the meeting

can be implied from and evidenced by the parties’ conduct and a course of dealing that indicates

the parties’ understanding of their contractual obligations. Id . The panel’s theory fails in this

case, however, because the requisite elements are not met.

88.

In Hamstein Cumberland Music Group v. Williams, appellant challenged the

denial of its motion to confirm an arbitration award based on the trial court’s finding that the

arbitrator exceeded his authority. 532 F. App’x at 539. There, both parties moved for sanctions

during a pending arbitration based on the same conduct—failure to comply with discovery

requests. Id. at 541. The arbitrator sanctioned Williams, but the district court held that the

arbitrator lacked authority to issue sanctions and refused to confirm that portion of the award. Id.

at 541-42.

89.

The Fifth Circuit disagreed, stating that Williams submitted the issue by moving

for sanctions “for the exact same reason that Hamstein moved for sanctions in the first place—

Williams claimed that Hamstein had failed to respond to discovery that he had requested of

Hamstein.” Id. at 543. Citing Executone Information Systems, Inc. v. Davis, the Court held that

“[t]he scope of an arbitrator's authority is a function of both the arbitration agreement and the

parties’ submissions, which include both formal, written submission agreements and merely

asking the arbitrator to decide an issue.” Id. (citing 26 F.3d 1314, 1323 (5th Cir. 1994).

90. In Executone, however, the Fifth Circuit made clear that “[i]f the parties go

beyond their promise to arbitrate and actually submit an issue to the arbitrator, we look both to


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kind has been made to any Party or to anyone acting for a Party, except as is expressly stated in

this SETTLEMENT AGREEMENT, and THE PARTIES execute this SETTLEMENT

AGREEMENT without reliance on any representation of any kind or character not expressly

stated in this SETTLEMENT AGREEMENT . . . .”143 The Agreement likewise states that

“[b]efore executing this SETTLEMENT AGREEMENT, THE PARTIES became fully informed

of the terms, contents, conditions, and effect of this AGREEMENT, and received independent

legal counsel and advice before agreeing to the terms of this AGREEMENT,” and that the parties

entered the agreement “freely, by THE PARTIES’ own choice and judgment, and without duress

or other influence . . . .”

144

93. There is no evidence of any “course of dealing” with respect to requesting post-

arbitration sanctions capable of giving rise to an implied contract to submit all sanctions issues to

the arbitration panel for all time. The only act that could have completed the alleged

modification, SCA’s June 2013 motion to reconvene, is too remote in time and too substantively

different from Armstrong’s and SCA’s post-settlement requests for relief to support an implied

modification. SCA’s position would permit sanctions claims based upon the prior arbitration

hearing, ad infinitum, and is absurd. Analyzing the arbitration agreement in its entirety and the

precise scope of the submissions to the panel to determine its authority, it is clear that

Armstrong’s and Tailwind’s earlier requests were not an implicit submission to the panel

authorizing it to sanction them—by essentially undoing the freely-negotiated settlement—as

SCA requests. The Panel simply had no authority to sanction Tailwind and Armstrong for

conduct that occurred during the arbitration.

143 Exhibit B.144 Id.


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6. Tailwind Is Not a Party to an Arbitration Agreement—It Is a Dissolved

Entity, and the Arbitrators Exceeded Their Authority by Entering Sanctions

Against It

94. As the Texas Supreme Court has recognized, under the common law, “dissolution

terminate[s] the legal existence of a corporation. Once dissolved, the corporation [can] neither

sue nor be sued, and all legal proceedings in which it was a party [are] abated.” Hunter v. Fort

Worth Capital Corp., 620 S.W.2d 547, 549-50 (Tex. 1981). In response to the common-law rule,

“the trust fund doctrine emerged whereby a creditor of the dissolved corporation could pursue

the traceable assets of the dissolved corporation on the theory that such assets were burdened

with a lien in the creditor’s favor.” Pellow v. Cade, 990 S.W.2d 307, 313 (Tex. App.—

Texarkana 1999, no pet.); see Hunter , 620 S.W.2d at 550. As early as 1879, the Legislature

enacted remedial statutes embodying the trust fund doctrine in an effort to supplant the common-

law abatement rule. Hunter, 620 S.W.2d at 550. “The effect of these statutes was to supplant the

equitable trust fund theory by declaring a statutory equivalent. In Texas, recognition of the trust

fund theory, as applied to dissolved corporations, did not exist apart from these statutes.” Id.

95.

The Texas Legislature, however, imposed severe limits on the trust fund doctrine

in the predecessors to sections 11.351, 11.356, and 11.359 of the Texas Business Organizations

Code. TEX. BUS. ORGS. CODE §§ 11.351; 11.356, 11.359. Through these provisions, the

Legislature likewise embodied the trust fund doctrine in its currently limited state. Hunter, 620

S.W.2d at 549. Specifically, section 11.359(a) provides: “Except as provided by Subsection (b),

an existing claim by or against a terminated filing entity is extinguished unless an action or

proceeding is brought on the claim not later than the third anniversary of the date of termination

of the entity.” TEX. BUS. ORGS. CODE § 11.359. Notably, a dissolved corporation can only be

liable for a claim existing at the time of its dissolution. Id. § 11.351.


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96. The current Texas statutory scheme applies to arbitration proceedings, and it

precludes any arbitration of SCA’s claims against Tailwind. Section 11.359(a) applies its

prohibition against “action[s] and proceeding[s]” brought after three years following a

corporation’s dissolution. See id. The term “proceeding” is broadly defined, and it should include

an arbitration proceeding. See Reveille Tool & Supply, Inc. v. State, 756 S.W.2d 102, 103 (Tex.

App.—Austin 1988, no writ) (discussing phrase “action or proceeding” in substantially similar

predecessor statute and finding that it included administrative proceedings). Even if it did not,

the statutes make no allowance for arbitration proceedings instituted after a corporation has been

dissolved for three years. See TEX. BUS. ORGS. CODE §§ 11.351; 11.356, 11.359. Either way, as a

dissolved entity that can no longer be subjected to a “legal proceeding,” Tailwind is no longer a

party to any arbitration agreement with SCA and therefore cannot be forced to arbitrate under

Texas law.

97. The result would be the same under Delaware law. In Delaware, the trust fund

doctrine has been “largely discredited and abandoned[.]” See CML V, LLC v. Bax, 6 A.3d 238,

253-54 (Del. Ch. 2010), aff’d , 28 A.3d 1037 (Del. 2011). The Delaware Legislature, like the

Texas Legislature, has emasculated the doctrine by declaring that a dissolved Delaware

corporation can only sue or be sued within three years after its dissolution date. DEL. CODE A NN.

tit. 8 § 278; see Frederic G. Krapf & Son, Inc. v. Gorson, 243 A.2d 713, 715 (Del. 1968); United

States v. McDonald & Eide, Inc., 670 F. Supp. 1226, 1231 (D. Del. 1987) , aff’d, 865 F.2d 73 (3d

Cir. 1989). The existence of a liquidating trust does not extend the three-year period. See City

Investing Co. Liquidating Trust v. Cont’l Cas. Co., 624 A.2d 1191, 1197 (Del. 1993) (describing

and treating liquidating trust as separate entity from dissolved corporation to which Section 278

does not apply).


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98. By including Tailwind in its re-convened arbitration, and awarding sanctions

against it, the arbitration panel purports to enforce an arbitration agreement with Tailwind more

than three years after Tailwind has dissolved.145

Delaware law, however, does not allow a party

to enforce an obligation against a dissolved corporation more than three years after the

dissolution date. See Aluminum Co. of Am. v. Beazer E., Inc., 124 F.3d 551, 567 (3d Cir. 1997)

(citing Cont’l Cas. Co., 624 A.2d at 1195).

99. Further, Delaware’s statutory language is more restrictive than Texas law when

dealing with dissolved corporations. Under Section 278 of the Delaware Code, a corporation

may only be continued for three years after dissolution for the prosecution or defending of suits.

DEL. CODE A NN. tit. 8 § 278. The statute makes no accommodation for arbitration proceedings.

See id. As such, under Delaware law, an arbitration panel could not exercise jurisdiction over

claims against a dissolved corporation. See id. Assuming that the statute made allowance for

arbitration proceedings, however, an arbitration panel would still lack jurisdiction over a

dissolved corporation if a proceeding were convened after three years following the

corporation’s dissolution. See id.

100. The three-year period is not a “limitations period”—it is a survival period, the

expiration of which extinguishes the claim by or against the corporation. Pellow, 990 S.W.2d at

313. Consequently, after the claim is extinguished, a court has no power to adjudicate it. Id .

“[W]hen a cause of action is outside a survival statute’s ambit, the cause of action is

extinguished and no longer exists.” Id . Any judgment thereon is a “nullity.” Id . If a dissolved

entity can no longer be sued in court, then it likewise cannot be forced to defend itself in an

arbitration proceeding.

145 Exhibit H.


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101. SCA did not contest the proof that Tailwind dissolved on December 31, 2007,

more than three years before SCA filed this lawsuit and attempted to “reconvene” the prior

arbitration.146

Any claim that SCA may have had against Tailwind was therefore extinguished

upon the three-year anniversary of its dissolution—more than two years before SCA instituted

this lawsuit or attempted to reconvene the prior arbitration. Because there is no longer an entity

capable of having agreed to arbitration under the Compromise Settlement Agreement or any

other arbitration clause, no enforceable arbitration agreement exists between Tailwind and SCA.

102.

Accordingly, the panel exceeded its authority by determining that a valid

arbitration agreement still exists between SCA and Tailwind, a dissolved entity that no longer

exists.

7. The Arbitrators Exceeded Their Powers Because the Functus Officio

Doctrine Barred Them from Reconvening the Previous Arbitration

103. “Arbitrators exhaust their power when they make a final determination on the

matters submitted to them. They have no power after having made an award to alter it; the

authority conferred on them is then at an end.” Bayne v. Morris, 68 U.S. (1 Wall.) 97, 99, 17 L.

Ed. 495 (1863). This common-law doctrine is known as functus officio —“a task performed.” See

Brown v. Witco Corp., 340 F.3d 209, 218-19 (5th Cir. 2003); see also Green v. Ameritech Corp.,

200 F.3d 967, 976-77 (6th Cir. 2000) (defining term as “‘[h]aving fulfilled the function,

discharged the office, or accomplished the purpose, and therefore of no further force or

authority’” (quoting BLACK ’S LAW DICTIONARY 673 (6th ed. 1990)); Denver City Energy

Assocs., L.P. v. Golden Spread Elec. Co-op., Inc., 340 S.W.3d 538, 544 n.6 (Tex. App.—

Amarillo 2011, no pet.) (“Under the common law, [a]rbitrators complete their function and lose

their authority to act after making a final determination on a matter.”) (citation and internal

146 See generally Exhibits I, J.


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quotations omitted).147 A major purpose of the doctrine is to protect the finality of an arbitrator’s

decision. See Anderman/Smith Operating Co. v. Tenn. Gas Pipeline Co., 918 F.2d 1215, 1220

n.4 (5th Cir. 1990).148

104. Here, the arbitration panel unquestionably completed its task when it rendered the

Final Arbitration Award based on the Settlement Agreement.149 Thus, “reconvening” the

arbitration as SCA requested was improper under the functus officio doctrine and exceeded the

panel’s authority. See also TEX. CIV. PRAC. & R EM. CODE § 171.054 (setting out limited

circumstances under which arbitrators may modify or correct awards).150

105.

This conclusion is especially true with respect to sanctions—the relief SCA has

obtained from the arbitrators.151 All of the conduct recognized as supporting the sanctions

occurred during the original arbitration proceedings.152 To be sure, the arbitrators were permitted

to police the arbitration process and fashion appropriate remedies to effectuate their authority

while the original arbitration was ongoing , Hamstein Cumberland Music Group v. Williams, 532

F. App’x 538, 539 (5th Cir. 2013), but that power came to an end when the arbitration

concluded. The functus officio doctrine precludes reopening an arbitration more than seven years

after rendition of the final award to mete out sanctions or for any purpose outside one of the

doctrine’s recognized exceptions, particularly when, as here, the arbitration concluded through a

147 Neither Texas courts nor the Fifth Circuit have addressed the functus officio doctrine in detail. See Brown v.

Witco Corp., 340 F.3d 209, 218 (5th Cir. 2003). However, other circuits have addressed the doctrine at length, and

the Fifth Circuit has found their view of the doctrine persuasive. Id .148 The doctrine has some exceptions, none of which apply here. “An arbitrator can (1) correct a mistake which

is apparent on the face of his award; (2) decide an issue which has been submitted but which has not been

completely adjudicated by the original award; or (3) clarify or construe an arbitration award that seems complete but

proves to be ambiguous in its scope and implementation.” Brown, 340 F.3d at 219.149 See Exhibits B & C.150 Exhibit E at 4 (concluding that, consistent with functus officio doctrine, TAA Section 171.088 grants

courts, not arbitrators, authority to vacate arbitration awards).151 Exhibit K.152 Id. at 14.


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Procedures (“CARP”) Rule 22(i) (2010).154 Once transmitted or served, an award is final and

may only be modified—in a short, prescribed time period—to correct computational,

typographical, or other similar errors. See AAA, Commercial Arbitration Rule 46; AAA,

International Arbitration Article 30; JAMS, CARP Rule 24(j) & (k)).

108. The Positive Software court did not hold that arbitrators have the power to reopen

proceedings years after the fact to consider sanctions requests based on conduct during

arbitration. Rather, the Fifth Circuit merely pointed out some potential options in response to

Positive Software’s complaint that it lacked any means to address the supposed wrongdoing.

Positive Software, 619 F.3d at 462-63. The functus officio doctrine never came into play because

Positive Software never sought sanctions from the arbitrators, but instead asked the district court

to order them based on its inherent authority after the case was administratively closed. See id. at

460-63.

109. The majority’s reliance on Lehigh Valley Railroad Co. v. Germany,155 an

international arbitration from the 1930s, is likewise misplaced. Here, the majority found that the

Lehigh cases support arbitrator jurisdiction because of certain “parallels between that tribunal

and this one . . . .”156

110. The Lehigh cases, however, provide no support for reconvening an arbitration and

issuing an award nearly a decade after its conclusion by settlement and final confirmation of the

award. First, any remedy for alleged “fraud upon the tribunal” lies in the courts, not in a “re-

convened” arbitration. See TEX. CIV. PRAC. & R EM. CODE § 171.088(a) (providing for vacatur of

arbitration award “obtained by corruption, fraud, or other undue means”). The two-arbitrator

154 Defendants ask the Court to take judicial notice of these rules, which are readily available through the AAA

and JAMS websites, http://www.adr.org/aaa/faces/rules and http://www.jamsadr.com/rules-clauses/.155 The Lehigh opinions are several hundred pages in length. Defendants will make copies available for the

Court at the hearing.156 Exhibit D at 5; Exhibit K at 11.


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majority cited no authority—and there is none—that an arbitration panel may take matters into

its own hands years after the fact to remedy any alleged fraud.

111. Second, the Compromise Settlement Agreement, while it contained an arbitration

clause, was hardly a “temporary cease-fire” between the parties. To the contrary, as set out

above, the Compromise Settlement Agreement fully and finally resolved any disputes then

existing and resulted in an agreed Final Arbitration Award.157 Although disputes regarding

performance or enforcement of the agreement might arise, the notion that the Compromise

Settlement Agreement was nothing more than a short-term solution to a larger problem is an

absurd, result-oriented justification for expanding the arbitration panel’s power in a manner the

parties plainly did not contemplate when they entered into the settlement and agreed Final

Arbitration Award.

112. Moreover, the Lehigh decisions simply do not apply to expand arbitrator

jurisdiction in the manner the majority held. Those decisions were rendered by a commission

created for the purpose of resolving reparations claims against Germany due to acts of sabotage

against American citizens, as required by the Treaty of Berlin and an agreement between the

United States and Germany dated August 10, 1922. This agreement created the “Mixed Claims

Commission,” which consisted of one commissioner appointed by the United States, one

appointed by Germany, and an umpire.

113. Lehigh was no ordinary arbitration—it was one between two governments by a

long-standing commission appointed to decide numerous cases between the two governments at

an extremely precarious point in our nation’s history. But most importantly, the procedural

history of the Lehigh cases ultimately shows that the rules and procedures applicable to the

Commission gave express authority to the Commission to reopen a case, without any time limit.

157 See Exhibits B & C.


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Neither SCA nor the two-arbitrator majority has pointed to any provision bestowing similar

power on the panel that heard the original dispute in 2005 and 2006. The dissenting arbitrator

recognized as much, concluding that “SCA . . . failed to identify a similar procedural rule

applicable to this case that provides for re-opening of this arbitration.”158

114. Even if the Court were to consider this complicated and outdated group of

decisions as precedent, it is clearly distinguishable, most notably because the arbitrators were not

induced to render any award based on anything other than the parties’ own Compromise

Settlement Agreement, which itself was reached at arm’s length, with competent counsel, and

with no party relying on anything any other party did or said. Litigation must end at some point.

And in this case it did—with a settlement and award that is and must be binding and cannot now

be disturbed.

115. In conclusion, the arbitrators exceeded their authority under the doctrine of

functus officio, and the award must be vacated.

8. The Arbitrators Exceeded Their Authority By Modifying the Award

Years After it Became Final.

116. The TAA provides express provisions for obtaining a modification of an award by

the arbitrators, limits the type of modifications that the arbitration panel can make, and provides

deadline for seeking the modifications. Section 171.054 allows arbitrators to modify or correct

award on limited grounds only upon an application filed “not later than the 20th day after the

date the award is delivered to the applicant.” TEX. CIV. PRAC. & R EM. CODE § 171.054.

Thereafter, a party is limited to challenging the award through a motion to vacate, which must be

filed within 90 days after delivery of a copy of the award to the applicant. Id . § 171.091

(authorizing application for court to modify award on limited grounds within 90 days). When an

158 Exhibit E at 4.


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arbitration panel modifies an award on grounds not provided by the statute and outside the time

limits provided in the TAA, the modified award exceeds the arbitrators’ power and must be

vacated. Barsness, 126 S.W.3d at 241.

117. SCA’s request for relief in the form of “sanctions” was an end-run around these

provisions, and by indulging the request, the arbitration panel exceeded its authority. It is

undisputed that SCA’s attempt to reconvene this arbitration occurred well after the time limits in

section 171.054 expired, and SCA did not even raise any grounds recognized by the statutes as

appropriate grounds for modification.159 And, as pointed out below and in Defendants’ pleas to

the jurisdiction, SCA’s attempts to vacate the award came too late as well. See infra Part IV.C.3.

This Court should vacate the award because the arbitrators clearly exceeded their authority.

C. The Award Must Be Vacated Because It Violates Texas Public Policy

118. Defendants request that the Court vacate the arbitration award because it violates

the following Texas public policies: (1) The public policy in favor of settlement of disputes; (2)

The public policy in favor of finality of arbitration awards, including enforcing confirmed

arbitration awards, and the use of vacatur by a court of law as the sole method of setting aside a

final arbitration award; (3) The public policy in favor of allowing corporations to dissolve and

wind up their affairs.

1. Standard of Review and Governing Law

119. “While the review of an arbitration award is normally exceedingly narrow, courts

should not confirm an award if that award is contrary to public policy.” Symetra Nat. Life Ins.

Co. v. Rapid Settlements, Ltd., No. 14-07-00880-CV, 2009 WL 1057339, at *2 (Tex. App.—

Houston [14th Dist.] Apr. 21, 2009, no pet.) (mem. op.) (citing Apache Bohai Corp., LDC v.

Texaco China BV , 480 F.3d 397, 401 (5th Cir. 2007); Myer v. Americo Life, Inc., 232 S.W.3d

159 Compare Exhibit A, with Exhibits B, C.


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401, 408 (Tex. App.-Dallas 2007, no pet.)); see also CVN Group, Inc., 95 S.W.3d at 239-40

(explaining that for a “public policy” concern to support setting aside an arbitration award it

must be “well defined and dominant” and not cobbled “ ‘from general considerations of

supposed public interests.’”).

120. For example, where a Texas statute announces public policy, and in particular

precludes certain actions in court or otherwise, the statute provides an express public policy that

cannot be subverted through arbitration. In other words, a party cannot “accomplish through

arbitration that which the [legislative] acts prevent it from otherwise doing.” Id. at *3.

2. The Award Violates the Public Policy in Favor of Voluntary Settlement

121. The Texas Legislature has expressly determined that the public policy of Texas is

to encourage the settlement of legal disputes. See TEX. CIV. PRAC. & R EM. CODE § 154.002

(West 2011) (“It is the policy of this state to encourage the peaceable resolution of disputes, ...

and the early settlement of pending litigation through voluntary settlement procedures.”). The

Legislature has expressly tasked the courts with enforcing this public policy: “It is the

responsibility of all trial and appellate courts and their court administrators to carry out the

policy under Section 154.002.” TEX. CIV. PRAC. & R EM. CODE § 154.003. This is a well-defined

public policy in Texas that has been expressly committed to the courts for enforcement of the

policy.

122. Here, the 2006 Final Award derived from a voluntary settlement agreement of the

parties, and it expressly included a waiver of the right to challenge the award and disclaimed

reliance on any representations not set forth in the contract.160

The panel, however, failed to

protect this public policy in favor of voluntary settlements by ef

lance armstrong does not want to pay sca $10 million

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