Free Motion to Vacate - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Senior Judge Zita L. Weinshienk Civil Action No. 96-cv-2451-ZLW-MJW CO2 COMMITTEE, INC., a Colorado non-profit corporation, Plaintiff, v. SHELL OIL COMPANY, et al., Defendants. Civil Action No. 00-cv-1854-ZLW-MJW CO2 COMMITTEE, INC., a Colorado non-profit corporation, Plaintiffs, v. SHELL OIL COMPANY, et al., Defendants. Civil Action No. 00-cv-1855-ZLW-MJW CO2 COMMITTEE, INC., a Colorado non-profit corporation, Plaintiffs, v. SHELL OIL COMPANY, et al., Defendants. Civil Action No. 00-cv-1856-ZLW-MJW CO2 COMMITTEE, INC., a Colorado non-profit corporation, Plaintiffs, v. SHELL OIL COMPANY, et al., Defendants.

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______________________________________________________________________________ MOTION TO VACATE ARBITRATION AWARD Pursuant to Section 10(a) of the Federal Arbitration Act, 9 U.S.C. § 10(a), Plaintiff CO2 Committee, Inc.,1 hereby moves this Court to vacate an arbitration award entered on August 7, 2006 by a panel of three arbitrators. In support of this request, Plaintiff states: INTRODUCTION For over ten years, this Court has overseen all aspects of this complicated set of integrally related class action lawsuits concerning production of carbon dioxide (CO2) from the McElmo Dome Unit, a massive CO2 production unit located in Montezuma and Dolores Counties, Colorado. As the Court is aware, after years of hard-fought litigation, the parties took very deliberate and detailed steps to conclude these matters through a comprehensive Settlement Agreement. In turn, the Court reviewed and approved the Settlement Agreement, determining that its terms and conditions were fair, reasonable and adequate to all concerned. The parties' underlying dispute generally concerned proper valuation of CO2 produced from the McElmo Dome Unit as that valuation determined the ultimate return on Plaintiff's interests in the McElmo Dome Unit. A central component of this valuation dispute was the transportation tariff applicable to CO2 produced from the Unit. This dispute was resolved through the Settlement Agreement by mandating the manner in which Defendants were to calculate the value of Plaintiff's interests in the McElmo Dome Unit, including the manner in
Plaintiff CO2 Committee, Inc. is a non-profit corporation organized under the laws of the State of Colorado pursuant to an order of this Court for the purpose of enforcing the future relief provisions of the Settlement Agreement entered into by the parties on September 24, 2001. Since Plaintiff was formed to represent its members who were named plaintiffs or class plaintiffs in the underlying litigation, the term "Plaintiff" as used below refers to both Plaintiff and its members, all of whom were beneficiaries under the Settlement Agreement.
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which the tariff was to be calculated. In addition, the Settlement Agreement imposed specific reporting requirements on Defendants to render their transportation tariff calculations transparent to Plaintiff. In 2004, pursuant to these reporting requirements, Plaintiff concluded that Defendants were not correctly determining the tariff as required by the Settlement Agreement. Specifically, Plaintiff determined that Cortez Pipeline Company ("Cortez) was making distributions in excess of those permitted by the Settlement Agreement and setting its tariff to recover a $68 million "carry forward" not authorized by the Settlement Agreement, both of which actions had the effect of increasing the tariff and correspondingly decreasing the amounts to which Plaintiff was entitled for its interests in the McElmo Dome Unit. When confronted with Plaintiff's suspicions to this effect, Defendants explained that they believed the Settlement Agreement allowed them to incorporate their historic accounting practices and argued that the negotiations and litigation leading to the Settlement Agreement justified their departure from the clear calculation requirements set forth in the Agreement. Defendants' efforts in this regard constituted nothing more than a blatant attempt to rewrite the Settlement Agreement with the obvious and necessary goal of lowering the amounts Defendants owed to Plaintiff. In fact, to date, Defendants have used their interpretation of the Settlement Agreement to withhold more than $12.5 million to which Plaintiff is entitled under the Settlement Agreement. The parties first attempted to mediate this dispute. When that effort failed, they submitted it to arbitration as required by the Settlement Agreement. Ultimately, after a five day arbitration held in Albuquerque, New Mexico in June 2006, the three person arbitration panel

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(the "Panel") held for Defendants. A copy of the Panel's Opinion to this effect is attached hereto as Exhibit 1. Plaintiff realizes that the standards for vacating an arbitration award are stringent and courts are inclined not to disturb such awards. However, Plaintiff submits that the Panel's Arbitration Award is so beset by deficiencies as to satisfy the high standard necessary to vacate an arbitration award. As shown below, in reaching its decision, the Panel defied Colorado law concerning contract interpretation by using extrinsic evidence to rewrite the Settlement Agreement and ignoring the plain language of the Settlement Agreement. The Panel then compounded its error by denying Plaintiff the opportunity to present evidence which would have limited the prejudicial effect of the Panel's decision to ignore Colorado law. Finally, it should be noted that this Court has retained jurisdiction over matters such as this motion. In particular, paragraph 8 of the final judgments it issued with respect to this dispute on May 6, 2002 provide: Without affecting the finality of this judgment in any way and subject to the arbitration provisions of the Settlement Agreement, this Court hereby retains continuing jurisdiction over (a) implementation of this Settlement and any award or distribution of the Settlement Fund, including interest earned thereon, (b) allocation and disposition of amounts of and from the Settlement Fund and (c) all Settling Parties for the purpose of enforcing and administering the Settlement Agreement and this final judgment." (Emphasis supplied.) Given this reservation of jurisdiction, it is appropriate and proper for this Court to consider and resolve this motion. BACKGROUND TO ARBITRATION As this Court will recall from its long-standing, substantial oversight of this matter, the underlying dispute involves valuation of CO2 produced from the McElmo Dome Unit.

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Generally, through various contracts and leases, Defendants have made payments to Plaintiff attributable to its interests in the McElmo Dome Unit based the value of the CO2 production. Historically, Defendants determined the value of CO2 production attributable to Plaintiff's interests by subtracting the transportation tariff from the proceeds received from downstream sales of CO2, a process referred as "net-backing." Given this process, the tariff obviously and evidently plays a substantial role in determining the ultimate amounts to which Plaintiff is entitled for its McElmo Dome interests. Prior to the parties entering into the Settlement Agreement, Cortez represented that its tariff would be determined through application of the Consent Decree entered in United States v. Atlantic Refining Co., et. al., No. 14060 (D.D.C. Dec. 13, 1982) ("Consent Decree"). Under the Consent Decree, the amount of Cortez's tariff, which varied from year to year, was intended to annually generate sufficient revenue to cover the costs of operations and to provide, among other things, a return to Cortez's partners equal to, but no greater than, seven percent of the pipeline's valuation.. Under the Consent Decree and the netback valuation method utilized by Defendants, the higher the tariff, the less Plaintiff received for its interest in the McElmo Dome Unit. During the litigation, and against Defendants' protests to the contrary, Plaintiff consistently maintained that Cortez's tariff methodology did not generate a fair and reasonable tariff as required by common law. On September 24, 2001, the parties to these actions resolved the litigation through a Settlement Agreement, which was formally approved by this Court on May 6, 2002. As a threshold matter, the Settlement Agreement manifested the parties' intent that the four corners of the Settlement Agreement, not the parties' historic accounting practices or their litigation

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positions, were to control the parties' behaviors and practices going forward. Specifically, Section 13.18 of the Settlement Agreement provides: No additional obligations or understandings shall be inferred from any of the terms of this Agreement, as all obligations, agreements, and understandings with respect to the subject matter hereof are solely and expressly set forth herein. No modification or waiver of, addition to, or deletion from the terms of this Agreement shall be effective unless and until reduced to writing and signed by all of the Parties. [Emphasis added.] An additional, central provision of the Settlement Agreement sets forth an agreed methodology for calculating the Cortez tariff. This carefully negotiated methodology is set forth in Exhibit F to the Settlement Agreement and provides in parts pertinent to this motion, as follows: The 1941 Consent Decree ("Decree") restricts the payment to shipper-owners of any dividends derived from transportation or other common carrier services which in the aggregate is in excess of their share of seven percent (7%) of the valuation of such common carrier's property. Tariffs will be set using shippers' throughput forecasts for the upcoming year to generate revenues sufficient to recover the costs of operations, to provide return of capital invested through depreciation charges, to service debt, to provide a tax allowance based on the current statutory corporate tax rates consistent with industry practice, and to provide an amount which does not exceed 7% of the valuation (subject to make-up provisions described below). There are several considerations that go into making this tariff determination including: valuation, responses to market conditions, expected versus actual costs, expected versus actual volumes, and a procedure for true-ups as described below. In addition, subject to changed business conditions, Cortez Pipeline Company plans to allocate one-third of its available cash flow to debt retirement over the five-year period ending December 31, 2005. *** Because volume expectations can vary month to month and over a long period of time, the Cortez Pipeline Company Tariff will be determined in a manner that balances uncertain and changing volumes and cost factors while

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limiting volatility. Cortez Pipeline Company would also like to stabilize the level of distributions to its partners to facilitate the financial planning while adhering to the Decree as describe above. The Decree provides for under-distributed amounts to be distributed at any time and under-earned amounts to be distributed within the following three years. These provisions of the Decree give Cortez Pipeline Company flexibility to respond to changing volumes and cost parameters and the ability to set distributions at a reasonable level for extended periods of time despite fluctuations in market conditions. [Emphasis added.] The entirety of Exhibit F to the Settlement Agreement is attached hereto as Exhibit 2. The only sentence in this excerpt from Exhibit F to the Settlement Agreement specifically addressing the possible inclusion of carry forwards in the tariff calculation is the statement that, "The Decree provides for ... under earned amounts to be distributed within the following three years." Id. Exhibit F to the Settlement Agreement also provides that Cortez would set its tariff so as to restrict distributions to its partners to no more than that "which in the aggregate is in excess of their share of seven percent (7%) of the valuation of [Cortez's] property." Id. Exhibit F further provides that "[t]ariffs will be set . . . to provide a tax allowance based on the current statutory corporate tax rates consistent with industry practice, and to provide an amount which does not exceed 7% of the valuation (subject to the make-up provisions below)." Id. Notwithstanding the terms set forth in Exhibit F, Cortez included $68 million in presettlement carry forwards when it made its initial tariff calculation pursuant to Exhibit F and the Settlement Agreement. In addition, it not only distributed 7% of the value of its property to its partners, it also distributed tax allowances in excess of the 7% cap. Plaintiff contended that Cortez's inclusion of pre-settlement carry forwards in calculating the tariff violated Exhibit F and the Settlement Agreement, resulting in over $12.5 million in damages to Plaintiff. Plaintiff further contended that Cortez's distribution of tax allowances in

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excess of the 7% cap violated Exhibit F and the Settlement Agreement, resulting in approximately $283,000 in damages to Plaintiff. Defendants did not agree with these contentions and the dispute was submitted to arbitration. Eventually, the Panel agreed with Defendants and determined that Defendants were authorized to do each of the things complained of by Plaintiff pursuant to Exhibit F and the Settlement Agreement. The Panel's opinion to in this regard gives rise to the present Motion. ARGUMENT The Federal Arbitration Act sets forth various grounds justifying vacation of an Arbitration Award. Among other things, a district court may vacate an arbitration award where the arbitrators refused to hear evidence pertinent and material to the controversy. 9 U.S.C. § 10(a)(3). The Tenth Circuit has expanded on these reasons and recognized that a district court may vacate an arbitration award if there was a "manifest disregard of the law," or a "denial of a fundamentally fair hearing." Denver & Rio Grande W. R.R. v. Union Pac. R.R., 119 F.3d 847, 849 (10th Cir. 1997); see also Dominion Video Satellite, Inc. v. Echostar Satellite, L.L.C., 430 F.3d 12.569, 12.574 (10th Cir. 2005) (explaining that a manifest disregard of the law is "willful inattentiveness to the governing law" and "the record must show the arbitrators knew the law and explicitly disregarded it.") Ignoring the plain language of a contract and instead imposing the arbitrators' own notions of "industrial justice" is grounds for vacating the award. Jenkins v. Prudential-Burke Securities, Inc., 847 F.2d 631, 635 (10th Cir. 1988); Challenger Caribbean Corp. v. Union General de Trabajordores de Puerto Rico, 903 F.2d 857, 861 (1st Cir. 1990). Here, the Panel manifestly disregarded applicable Colorado law concerning contract interpretation, contract ambiguities and extrinsic evidence. In addition, the Panel refused to hear

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evidence pertinent and material to this controversy and thereby denied Plaintiff a fundamentally fair hearing. The Court should vacate the Panel's Arbitration Award because of these errors. The first error committed by the Panel relates to its interpretation of Exhibit F to the Settlement Agreement on the issues of permissible distribution of tax allowances and permissible utilization of carry forwards. The Panel recognized that, if the disputed provisions of Exhibit F were unambiguous, it could not rely upon extrinsic evidence. It further recognized that it was required to determine after hearing extrinsic evidence whether the Agreement was ambiguous. Nevertheless, the Panel altogether failed to make the requisite determination of ambiguity. Even more egregious, after recognizing it was limited to relying upon extrinsic evidence only to clarify ambiguous terms, the Panel instead, without finding that Exhibit F was ambiguous, relied upon extrinsic evidence to rewrite Exhibit F. With respect to both the tax allowance issue and the carry forward issue, the Panel ultimately added terms to Exhibit F that cannot be found in the document itself. In short, in each instance, the Panel properly recognized the applicable Colorado rules concerning contract interpretation, ambiguity and extrinsic evidence, then blatantly disregarded those rules to find in favor of Defendants. The second error committed by the Panel relates to its refusal to allow Plaintiff to present evidence in opposition to Defendants' carry forward theory and the appropriate amount of any such carry forward. The Panel refused to hear this evidence despite the fact that Defendants opened the door to this line of evidence. This error was compounded when the Panel then refused to allow Plaintiff to cross examine Defendants' expert on the proper method for calculating carry forwards. Admission of Plaintiff's proferred evidence would have resulted in a profoundly different Arbitration Award because the refused evidence would have made clear that

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the Defendants' carry forward computation was overstated by approximately $65 million, resulting in substantial losses to Plaintiff. Based on these errors and its continuing jurisdiction over this matter, the Court should conclude that Plaintiff has satisfied the weighty standards necessary to vacate the Panel's Arbitration Award. 1. This Court is the proper venue to resolve this motion.

Section 10 of the Federal Arbitration Act, 9 U.S.C. § 10, provides that the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration. The venue provisions of 9 U.S.C. §§ 9-11 are permissive, not exclusive. Cortez Byrd Chips, Inc. v. Bill Harbert Construction Company, 529 U.S. 193, 203-204 (2000). As the Supreme Court noted in Cortez Byrd Chips, "[t]he parties may be willing to arbitrate in an inconvenient forum, say, for the convenience of the arbitrators, or to get a panel with special knowledge or experience, or as part of some compromise, but they might well be less willing to pick such a location if any future court proceedings had to be held there." Id. at 201. Thus, a party may seek to vacate an arbitration award in accordance with the general venue statute, 28 U.S.C. § 1391(a)(2), which provides that the proper venue in a diversity action is the "judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated." This action involves Colorado parties, Colorado property, and a district court action commenced, litigated and settled in Colorado. In addition, the Court expressly retained jurisdiction with respect to the Settlement Agreement, particularly its implementation and

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enforcement. This dispute specifically concerns implementation and enforcement of the Settlement Agreement. Accordingly, this Court is the proper venue for this motion. 2. The Panel Improperly Relied upon Extrinsic Evidence to Modify Exhibit F to the Settlement Agreement.

The questions of whether Defendants were authorized to include pre-settlement carry forwards in the calculation of the Cortez tariff and whether they were entitled to distribute tax allowances in excess of the 7% cap both implicate standard rules of contract interpretation. Here, in construing the terms of Exhibit F with respect to these issues, the Panel manifestly disregarded Colorado law2 concerning contract interpretation and impermissibly relied on extrinsic evidence to modify Exhibit F in favor of Defendants. A. Colorado Law Regarding Contract Interpretation, Ambiguity and Extrinsic Evidence.

The interpretation of a contract is a question of law. Radiology Prof. Corp. v. Trinidad Area Ass'n, Inc., 577 P.2d 748, 751 (Colo. 1978). "It is a court's duty to interpret a contract in a manner that effectuates the manifest intention of the parties at the time the contract was signed. A touchstone in determining the intention of the parties to a contract is the language of the written agreement. If the language is plain, clear and unambiguous, a contract must be enforced as written." Randall & Blake, Inc. v. Metro Wastewater Reclamation District, 77 P.3d 804, 806 (Colo.App. 2003). "Court's possess no authority to rewrite contracts and must enforce unambiguous contracts in accordance with their terms." Id.; Shaw v. Sargent School Dist. No. RE-33-J ex rel. Board of Education, 21 P.3d 446, 449 (Colo.App. 2001). Thus, in the absence of ambiguity, Colorado courts will not look beyond the four corners of the agreement in order to
The parties and the Panel unanimously agree that Colorado law governs this dispute. See also Settlement Agreement at § 13.19 (providing that as to "substantive matters and interpretation of terms" Colorado law applies).
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determine the meaning intended by the parties. USI Properites East, Inc. v. Simpson, 938 P.2d 168, 173 (Colo. 1997). Therefore, the first step in contract interpretation is to determine whether ambiguity exists. To ascertain whether certain provisions of a contract are ambiguous, the language used therein must be examined and construed in harmony with the plain and generally accepted meaning of the words employed and by reference to all the parts and provisions of the agreement and the nature of the transaction which forms its subject matter. Cheyenne Mountain School Dist. v. Thompson, 861 P.2d 711, 715 (Colo. 1993). A contract is ambiguous, "if it is fairly susceptible to more than one interpretation." Dormal v. Petrol Aspen, Inc., 914 P.2d 909, 912 (Colo. 1996). The mere disagreement of the parties does not establish that a contract is ambiguous. East Ridge of Fort Collins, LLC v. Larimer and Weld Irrigation Co., 109 P.3d 969, 974 (Colo. 2005). In deciding whether a contract is ambiguous, a court may consider extrinsic evidence bearing upon the meaning of the written terms, such as evidence of local usage and of the circumstances surrounding the making of the contract. However, the court may not consider the parties' own extrinsic expressions of intent. Cheyenne Mountain, 861 P.2d at 715. Once a contract is determined to be ambiguous, its interpretation becomes an issue of fact for the trial court to decide in the same manner as other disputed factual issues. Id. Only after a contract is deemed ambiguous may extrinsic evidence be used to assist in ascertaining the intent of the parties. Id. While extrinsic evidence is admissible to explain or supplement the terms of an agreement, it may not to vary or contradict them. Id. Put another way, extrinsic evidence that explains or supplements the terms of an agreement is admissible while extrinsic evidence that

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contradicts the agreement must not be received. Furthermore, resort to extrinsic evidence is only appropriate when the agreement is so ambiguous that the intent of the parties is not clear. Id. From these rules of contract interpretation, it is evident that determining whether an ambiguity exists is a crucial first step in contract interpretation. Whether an ambiguity exists determines whether a court (or, the Panel, in this instance) is permitted to receive extrinsic evidence. Furthermore, if a specific ambiguity to be resolved is identified, the rules set forth above establish the narrow range of admissible extrinsic evidence. Absent the clarity provided by identifying a precise ambiguity, it is easy to receive and rely upon a broad amount of inadmissible extrinsic evidence, precisely the error committed by the Panel in this matter. B. The Panel's Approach to Extrinsic Evidence.

On April 24, 2006, the Panel had occasion to address the admissibility of extrinsic evidence. Unfortunately, this Order, a copy of which is attached hereto as Exhibit 3, portends the Panel's willingness to disregard the rules of contract interpretation set forth above. Through its April 24, Order, the Panel initially concluded that Exhibit F to the Settlement Agreement unambiguously allowed Cortez to distribute tax allowances to its partners. Nevertheless, the Panel left two issues unresolved, namely (1) whether Exhibit F to the Settlement Agreement permitted the use of pre-settlement carry forwards in calculating the Cortez tariff and (2) whether allowable distribution of tax allowances was in addition to or limited by the 7% cap on distributions. After explaining that it could not determine those issues as a matter of law, it went on to state: Consequently, at the hearing on the merits, we will conditionally admit extrinsic evidence relevant to the meaning of the written terms used by the parties concerning this subject, such as evidence of the circumstances surrounding the making of the Agreement, and the conduct of the parties. The Panel will also

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admit evidence concerning the meaning of terms that were used in a special or technical sense not apparent from the Agreement itself including, but not limited to, the terms 'make-up provisions,' 'true-ups,' 'under-distributed amounts,' and 'under-earned amounts. The Panel recognizes that should it determine as the trier of fact, after consideration of the above extrinsic evidence, that the Agreement is not ambiguous on this subject, extrinsic evidence of the intent of the parties would not be admissible . . . . In the interest of time, expense, and the convenience of the parties and the Panel, it is the Panel's present intent to admit at the hearing on the merits all evidence relevant to the 'carry forward' issue, including extrinsic evidence concerning the mutual intent of the parties at the time of the execution of the Agreement. The Panel will disregard such evidence in the event it determines, as the fact finder, that the Agreement is not ambiguous on that issue. Exhibit 3 at 4 [emphasis added]. On its face, the Panel's Order is a recipe for error. First, the Panel avoided a final determination of ambiguity pretrial in favor of reserving ruling and hearing a broad range of extrinsic evidence. Second, even if it had determined that ambiguity existed (which it did not), the Panel created a process whereby it was likely to receive a form of extrinsic evidence that is never admissible ­ to wit, evidence of the individual intent that contradicts the terms of Exhibit F to the Settlement Agreement ­ by admitting "all evidence relevant to the `carry forward' issue..." C. The Panel Improperly Relied upon Extrinsic Evidence to Allow Cortez to Utilize Pre-Settlement Carry Forwards in Calculating its Tariff.

In its Opinion the Panel concluded that Defendants were entitled to utilize pre-settlement carry forwards in calculating the Cortez tariff. It was able to reach this conclusion only through the improper consideration of extrinsic evidence. As such, the Panel manifestly disregarded the law, thereby justifying vacation of its award. The Settlement Agreement requires the Cortez tariff to be calculated in accordance with the methodology set forth in Exhibit F to Settlement Agreement. Exhibit F arguably addresses

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the issue of carry forwards in, at most, three sentences. First, the second sentence of Exhibit F states, "[t]ariffs will be set . . . (subject to the make-up provisions described below)." Exhibit 2. Second, the second paragraph of Exhibit F provides that the tariff calculation methodology includes "a procedure for true-ups as described below." Id. Third, Exhibit F also indicates that "[t]he Decree provides for under-distributed amounts to be distributed at any time and underearned amounts to be distributed within the following three years." Id. at 2. Furthermore, Paragraph 5.3(j) of the Settlement Agreement, addressing disclosure requirements, provides a final, potential reference to carry forwards, stating, "Cortez agrees to make available . . . the following schedule of information on an annual basis for the prior year on or before March 31 of each year . . . (j) Remaining shortfalls in distributions, if any, from prior years[.]" None of these provisions explicitly and unambiguously allow the use of pre-settlement carry forwards in calculating the Cortez tariff and the Panel did not so find. Nevertheless, the Panel still concluded that Exhibit F and the Settlement Agreement allowed the use of pre-settlement carry forwards. However, it did so only by receiving and considering a broad and extensive range of extrinsic evidence. For example, the Panel considered the fact that the 1941 Consent Decree did not discuss how a pipeline owner might set tariffs. Exhibit 1 at 12. It also cited extensive testimony leading up to the creation of the Settlement Agreement. Id. at 14. The Panel relied on pre-settlement expert reports and exhibits thereto. It concluded that Plaintiff knew of Defendants' position on the carry forward issue before entering into the Settlement. Id. at 15. Finally, it noted that Cortez had no incentive to waive its existing carry forward at the time of the Settlement Agreement. Id. Based on these

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considerations, the Panel concluded that Exhibit F and the Settlement Agreement allowed the use of pre-settlement carry forwards. As notable as what the Panel did do ­ consider a broad range of extrinsic evidence ­ is what it did not do ­ identify any ambiguous provisions in Exhibit F. The Panel did not ever conclude that Exhibit F was ambiguous on the issue of carry forwards. It did not determine that the sentence, "[t]he Decree provides for under-distributed amounts to be distributed at any time and under-earned amounts to be distributed within the following three years" to be ambiguous. It did not find the term "under-earned amounts" to be ambiguous. By extension, because it never identified any ambiguity in Exhibit F, it did not and could not limit its consideration of extrinsic evidence to clarifying any ambiguity. Thus, the Panel skipped the critical first step of contractual interpretation, determining whether an ambiguity exists, and jumped straight to its consideration of extrinsic evidence. And, through its consideration of extrinsic evidence, the Panel concluded that Defendants did not violate the Settlement Agreement in utilizing presettlement carry forwards in its tariff calculation. Under the applicable rules of contract interpretation, the Panel was obligated to identify an ambiguity in Exhibit F before it could consider extrinsic evidence. It did not do so. Yet, it still received and considered ample extrinsic evidence and based its conclusions on that extrinsic evidence. Through its improper consideration of extrinsic evidence, the Panel reached the sweeping conclusion that the Settlement Agreement allowed pre-settlement carry forwards of $68 million even though there is not any provision in the Agreement or Exhibit F so stating. By so doing, the Panel invented a provision in the Settlement Agreement that did not exist while ignoring one that did, the integration clause that prevented the Panel from inferring any

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obligations, agreements or understandings not expressly set forth in the Settlement Agreement. Quite simply, the Settlement Agreement did not address the question of carry forwards. The Panel ignored Colorado law on extrinsic evidence and disregarded the Agreement's own integration clause and added a non-existent term to the Agreement based upon extrinsic evidence. Exhibit F to the Settlement Agreement simply provided that "[t]he Decree provides for under-earned amounts to be distributed within the following three years." Relying on impermissible extrinsic evidence, the Panel rewrote Exhibit F to, in essence, state, "[t]he Decree provides for under-earned amounts to be distributed within the following three years, including pre-settlement under-earned amounts carried on Cortez's books prior to its entry into this Settlement Agreement." This construction is neither supported by the plain terms of Exhibit F nor the applicable rules of contract interpretation. By disregarding these rules, the Panel manifestly disregarded the law in such a way as to justify vacation of the Arbitration Award. D. The Panel Improperly Relied upon Extrinsic Evidence to Allow Cortez to Distribute Tax Allowances in Excess of the 7% of the Valuation.

Through Exhibit F to the Settlement Agreement, Defendants agreed to calculate the Cortez tariff so that it would distribute to its partners no more than an amount "which in the aggregate is in excess of their share of seven percent (7%) of the valuation of [Cortez's] property." Exhibit 2. Exhibit F also provides that "[t]ariffs will be set . . . to provide a tax allowance based on the current statutory corporate tax rates consistent with industry practice, and to provide an amount which does not exceed 7% of the valuation (subject to the make-up provisions below)." Id. Despite this clear language, the Panel concluded that Cortez could distribute tax allowances to its partners even if the distribution of those allowances exceeded the

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7% valuation cap. In so doing, the Panel manifestly disregarded applicable rules of contract interpretation. The Panel's reliance on extrinsic evidence in interpreting Exhibit F is evident. In particular, the Panel cited and relied upon the parties' respective positions before they entered into the Settlement Agreement to support its conclusion. Exhibit 1 at 6 ("Plaintiff knew before the settlement" that Cortez was setting the tariff in accordance with its interpretation of the Consent Decree which allowed distribution of tax allowances in excess of the 7% Cap.); at 6-7 ("[B]efore the settlement Cortez claimed it had a right under its interpretation of the Consent Decree to set a tariff sufficient to fund a distribution of 7% of valuation plus tax allowances ...." [emphasis in original]; at 9 ("[A] close analysis of the words chosen by the parties to describe the Consent Decree reveals that this sentence is consistent with the position taken by Cortez before the settlement.") In addition, the Panel also cited and relied on a pre-settlement term sheet executed by the parties to conclude that the settlement allowed Cortez to dictate the determination of the tariff. Exhibit 1 at 8. Finally, the Panel buttressed its conclusions through reliance on the drafting and negotiation process which led up to the execution of the Settlement Agreement. Exhibit 1 at 8 ("During the drafting and negotiation process which led up to the execution of the Settlement Agreement ...."); at 9 ("Instead, after Cortez explained its position ... Plaintiff agreed in the first sentence of the first paragraph of Exhibit F that the Consent Decree 7% limit applied to `dividends.'") Thus, there can be no doubt that the Panel relied on extrinsic evidence to find in favor of Defendants on the tax allowance issue. Was that consideration of extrinsic improper? Most assuredly so. As with carry forward issue, the Panel received and considered extrinsic evidence without ever making the necessary

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threshold determination that Exhibit F to the Settlement Agreement was ambiguous. Furthermore and by extension, because the Panel failed to identify any ambiguous provisions of Exhibit F, it did not and could not limit its consideration of extrinsic evidence to clarify any particular term of the Settlement Agreement relating to tax allowances. As with the carry forward issue, where the Settlement Agreement was silent, the Panel chose to rely on extrinsic evidence to add a provision that does not exist. Nothing in the Settlement Agreement or Exhibit F allows Defendants to distribute more than the 7% of valuation. Yet, this is exactly what the Panel allowed through its consideration of extrinsic evidence. In doing so, it ignored the Settlement Agreement's integration clause and controlling law, manifestly prejudicing Plaintiff. At no time did the Panel find any explicit term that authorized Cortez to distribute tax allowances in excess of the 7% Cap. It did not analyze any term as being ambiguous on the issue. Relying on impermissible extrinsic evidence, the Panel rewrote Exhibit F to, in essence, provide that Cortez would set its tariff so that it would distribute to its partners no more than an amount, "which in the aggregate is in excess of seven percent (7%) of the valuation of Cortez's property, plus tax allowances without regard to the 7% of valuation cap." This construction is neither supported by the plain terms of Exhibit F nor the applicable rules of contract interpretation. By disregarding these rules, the Panel manifestly disregarded the law in such a way as to justify vacation of the Arbitration Award. 3. The Panel Improperly Excluded Evidence Concerning the Accuracy of Defendants' $68 Million Pre-Settlement Carry Forward.

Resolution of the foregoing issue did not entirely conclude the controversy between the parties. Even if it is assumed that the Panel correctly concluded that Exhibit F authorized and allowed Cortez to distribute 7% percent of valuation plus tax allowances and, further, to utilize

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pre-settlement carry forwards in setting its tariff, a question remained whether there was, in fact, an existing carry forward of $68 million as of the time of the settlement that qualified as "unearned" under Exhibit F. On this issue, the Panel simply adopted Defendants' $68 million unearned carry forward amount while denying Plaintiff the opportunity to contest it. The Panel adopted Defendants' $68 million figure for the carry forwards, stating that Plaintiff did not dispute the figure. Opinion at 15, fn. 4. The Panel's contention to the effect that Plaintiff did not dispute the figure is grossly inaccurate and incorrect, considering the fact that the Panel repeatedly rejected Plaintiff's attempts to introduce evidence on this very issue. Of course, having rejected Plaintiff's attempts to introduce evidence on the subject, it became that much easier for the Panel to claim that Plaintiff did not contest the issue. Nevertheless, by declining to hear Plaintiff's rebuttal evidence on the accuracy of the $68 million carry forward figure, the Panel refused to hear evidence pertinent and material to this controversy, thereby justifying vacation of the Panel's Arbitration Award. Defendants first introduced the $68 million carry forward figure in its pre-hearing brief and in its opening argument. Plaintiff's counsel asked its own expert, Dr. Jerome Hass, about the figure in his direct examination. Dr. Hass testified that the $68 million figure was not qualified as earned or unearned. Defendants then questioned Dr. Hass regarding this figure. On redirect questioning from Plaintiff's counsel, Dr. Hass confirmed that Defendants had not qualified its $68 million figure as being earned or unearned. The Panel subsequently questioned Dr. Hass about this earned/unearned distinction in the context of the $68 million figure, noting that Dr. Hass's carry forward figure was $13 or $14 million, rather than $68 million. Dr. Hass confirmed that the difference resulted from the distinction between earned and unearned figures.

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The Panel, however, noted a distinction between Dr. Hass's carry forward computation, which was done from 1998 forward, and the Defendants' computation which was done from 1984. Defendants acknowledged their awareness of Plaintiff's dispute regarding the $68 million figure in its case in chief, asking one of their witnesses "you understand that the plaintiffs are claiming . . . that Cortez failed to calculate its posted tariff as required by Exhibit F . . . [and] that the claim is being asserted that Cortez . . . is doing that by taking a distribution shortfall that existed as of 12/31/00 on its books and carrying that forward to 2001, and subsequent years, to earn it in those subsequent years, subject to the three-year rule?" Plaintiff then attempted to introduce evidence demonstrating the proper calculation for the unearned carry forward figure dating from 1984 forward. Each time, the Panel refused to allow the evidence. Ultimately, the Panel told Plaintiff's counsel that it would perform the calculation itself if Plaintiff's counsel would clarify the manner to do it. Despite Plaintiff's explanation and the Panel's assurance that it would perform the calculation, the Panel clearly did not do so. Instead, it ruled that Plaintiff's $68 million carry forward figure was "undisputed." It was clear error for the Panel to refuse to hear Plaintiff's rebuttal evidence on this subject. When Defendants asked Dr. Hass about the accuracy of the $68 million carry forward figure during cross-examination, they opened the door for further testimony from Dr. Hass on the subject. In the same vein, Defendants cannot dispute that their expert, Dr. Van Hoecke, was always going to, and did, testify about this issue in the Defendants' case-in-chief. When Plaintiff attempted to introduce evidence concerning the accuracy of Dr. Van Hoecke's calculation of the proper carry forward amount, the Panel sustained Defendants' objection and thereby prevented further cross examination. At minimum, when Defendants raised the issue of the accuracy of the

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$68 million carry forward figure through their expert, Plaintiff should have been afforded the opportunity to cross examine on the accuracy of the figure. The Panel prevented this from happening. By refusing to allow Plaintiff to present rebuttal evidence on the $68 million figure, the Panel allowed itself to find that stated that the Cortez's $ 68 million carry forward figure was undisputed. The record clearly contradicts that claim ­ in actual fact, the accuracy of the figure was hotly disputed but the correct calculation and poignant cross examination concerning the same was silenced by the Panel's refusal to hear Plaintiff's evidence. See Cartier v. Jackson, 59 F.3d 1046, 1048 (10th Cir. 1995) (recognizing that evidentiary decisions must be reversed if based on "an erroneous conclusion of law or manifests a clear error of judgment."); see also Grace United Methodist Church v. City of Cheyenne, 427 F.3d 775, 802-803 (10th Cir. 2005). The Panel's refusal to allow Plaintiff to present rebuttal evidence on the $68 million figure was neither harmless nor an otherwise minor error. For one thing, it allowed the Panel to erroneously conclude that the figure was undisputed. Furthermore, as made clear in Plaintiff's offer of proof on the issue, including Dr. Hass's intended exhibits, Defendants' erroneous $68 million carry forward figure resulted in over $12 million in damages to Plaintiff. Thus, it was both pertinent and material to this controversy. Because the Panel refused to hear evidence pertinent and material to the controversy and thereby deprived Plaintiff of a fundamentally fair hearing, the Court should vacate the Arbitration Award.

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CONCLUSION Based on the foregoing, Plaintiff requests that the Court vacate the arbitration award, order that a new arbitration panel be selected by the parties as set forth in the Settlement Agreement, and grant such additional relief as it deems just and proper. SIGNED this 6th day of November, 2006.

S/ Michael J. Heaphy ____________________________________ Michael J. Heaphy, Esq. Michael J. Heaphy, P.C. P.O. Box 1490 Vail, CO 81658 Telephone: (970) 476-2300 Facsimile: (970) 476-2301 Email: [email protected] Attorney for Plaintiff CO2 Committee, Inc.

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CERTIFICATE OF SERVICE I HEREBY CERTIFY that on this 6th day of November, 2006, I electronically filed the foregoing MOTION TO VACATE ARBITRATION AWARD with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following email addresses: [email protected], [email protected], [email protected], [email protected], [email protected], [email protected], and [email protected].

S/ Michael J. Heaphy ____________________________________ Michael J. Heaphy, Esq. Michael J. Heaphy, P.C. P.O. Box 1490 Vail, CO 81658 Telephone: (970) 476-2300 Facsimile: (970) 476-2301 Email: [email protected] Attorney for Plaintiff CO2 Committee, Inc.

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