Canadian Court Upholds Chevron’s Corporate Separateness and Its Right to Defend Against Judgment Obtained by Fraud

January 27, 2017

On January 20, 2017, the Ontario Superior Court of Justice granted summary judgment in favor of Chevron Canada Limited ("Chevron Canada") and partial summary judgment in favor of Chevron Corporation in Yaiguaje et al v. Chevron Corporation et al.  In Canada, Ecuadorian plaintiffs sought to recognize and enforce a fraudulent judgment obtained in Ecuador against Chevron Corporation.  And to collect on that judgment, the plaintiffs were attempting to seize the assets of Chevron Corporation’s seventh-level subsidiary, Chevron Canada.  Finding that Chevron Corporation and Chevron Canada are "separate legal entities with separate rights and obligations," however, the court dismissed the plaintiffs’ attempts to hold Chevron Canada liable.  Indeed, the Court recognized that the plaintiffs had not alleged any wrongdoing against Chevron Canada.  In a related decision, the Court rejected the plaintiffs’ attempts to prohibit Chevron Corporation from demonstrating that the Ecuadorian judgment was procured through fraudulent and corrupt means.  

And, on January 25, the Court rejected the plaintiffs’ motion to add Chevron Canada’s shareholder, Chevron Canada Capital Company ("CCCC"), as a party to the action.  Extending its reasoning from the January 20 decision to another independent Chevron subsidiary, the court stated, "[b]ecause the plaintiffs seek the same relief against CCCC as they did against Chevron Canada, I am of the view that their claim against CCCC cannot succeed for the same reasons that I concluded it could not succeed against Chevron Canada."  The court also held that the plaintiffs had not alleged a cause of action against CCCC and had failed to plead grounds to establish the jurisdiction of the court. 

The decisions represent a victory for Chevron, the principles of corporate separateness, and the rule of law.  It should have important implications for other companies and individuals faced with similar corrupt shakedown schemes.  Gibson Dunn represents Chevron Corporation in related actions and global strategy.

The Fraudulent Ecuadorian Judgment and Chevron’s RICO Lawsuit

The Ecuadorian case against Chevron was filed in 2003 by a group of Ecuadorian plaintiffs represented by U.S. plaintiffs’ lawyers alleging environmental harm.  Chevron never operated in Ecuador, but the plaintiffs asserted the company was responsible for alleged conduct by a Texaco subsidiary that operated in the region from 1964 to 1992. 

In February 2011, the trial court in Ecuador entered a $17.2 billion judgment against Chevron–$8.6 billion in compensatory damages and another $8.6 billion in punitive damages unless Chevron agreed to "apologize."  Chevron declined to do so.  (The punitive damages aspect of the judgment was later eliminated on appeal as being contrary to Ecuadorian law.)

As detailed here, Chevron uncovered extensive evidence of fraud on the part of the plaintiffs’ U.S. and Ecuadorian lawyers and agents.  As a consequence, Chevron filed suit in the Southern District of New York, alleging violations of the federal RICO statute and common law fraud and other torts.  In 2014, after a seven-week trial which included the live or deposition testimony of more than 50 witnesses and 4,000 exhibits, United States District Judge Lewis A. Kaplan issued a 485-page opinion detailing the fraudulent scheme to corrupt the Ecuadorian litigation.  The Second Circuit affirmed that decision in full, including the findings that the plaintiffs’ legal team bribed the Ecuadorian judge and ghostwrote the multi-billion-dollar judgment themselves.

The Canadian Action

In 2012, the Ecuadorian plaintiffs sought to recognize and enforce their fraudulent Ecuadorian judgment in Ontario, Canada.  Despite admitting in their complaint that they "do not allege any wrongdoing against Chevron Canada," the plaintiffs nonetheless sought to pierce the corporate veil and hold Chevron Canada liable for the judgment against Chevron Corporation.  Op. at ¶ 28.  Chevron Corporation and Chevron Canada initially challenged the jurisdiction of the Ontario courts.  In May 2013, the Ontario court held that there was "no basis in law or fact" to pierce the corporate veil and, since there were no assets to fight over in Canada, stayed the proceedings to avoid wasting judicial resources.  Op at ¶ 27.  On appeal, the Supreme Court of Canada held that the Ontario court had jurisdiction to hear the case, but expressly took no position on the merits of the Ecuadorian judgment, whether it could ever be recognized in Canada, or whether the assets of Chevron Canada could ever be used to satisfy a judgment against Chevron Corporation.  Op at ¶ 20. 

The Supreme Court of Canada’s decision set the stage for a battle over two important questions–(i) can the assets of an independent subsidiary be seized in a recognition action to satisfy the alleged debts of a parent corporation; and (ii) can a judgment debtor defend against attempts to recognize that judgment on the basis that it was obtained through fraud, even where the foreign court itself addressed some of those allegations?  On January 20, the Ontario Court ruled in Chevron’s favor on both questions.

Reaffirmation of the Bedrock Principle of Corporate Separateness

The Ontario court’s decision reaffirms the bedrock principle of corporate separateness and demonstrates that those principles apply in the context of recognition and enforcement actions.  Following principles of law established since 1896, the court granted summary judgment for Chevron Canada, partial summary judgment for Chevron Corporation, and dismissed the plaintiffs’ motion for summary judgment on corporate separateness.  The decision rejects the plaintiffs’ attempts to hold an indirect subsidiary liable for the alleged debts of its parent corporation. 

As it had in 2013, the court noted that Plaintiffs failed to allege "any wrongdoing against Chevron Canada" and, accordingly, dismissed the claim against it.  Op at ¶ 65.  Indeed, the court found that the plaintiffs’ claim "contains no pleading of facts which links Chevron Canada in any way" to Ecuador.  Op at ¶ 28.  That, in addition to the important fact that Chevron Corporation and Chevron Canada are "separate legal entities with separate rights and obligations," led the Court to rule that the fraudulent judgment against Chevron Corporation could not be enforced against Chevron Canada.  Op at ¶ 58.

Reaffirming foundational principles of Canadian corporate separateness law, the court rejected the plaintiffs’ attempts to create a new notion of "enterprise group liability" or, in fact, any exception to corporate separateness "in the interests of justice."  The court also dismissed plaintiffs’ arguments that a Canadian statute, the Execution Act, conferred Chevron Corporation with beneficial property rights in an indirect subsidiary.  Op at ¶¶ 31-49.  The court held that the Execution Act–which provides mechanisms for seizing the assets of judgment debtors–is procedural only and does not create new substantive rights.  In so ruling, the court agreed with Chevron Corporation’s assessment of the policy consequences of the plaintiffs’ arguments: "If the plaintiffs’ position . . . is accepted, the assets of Ontario subsidiaries of both domestic and foreign companies would automatically and always be subject to execution orders to satisfy judgments against their parent companies . . . [t]his result is not only contrary to law, it would have startling and stark consequences for Ontario’s businesses and their ability to attract investment.

A Corrupt Court’s Judgment Is No Judgment at All

Chevron Corporation will argue against recognition principally on the grounds that: (a) the Ecuador judgment was obtained by fraudulent means from a corrupt and biased court in proceedings lacking Canadian standards of fairness and justice; and (b) the Ecuador court did not have jurisdiction over Chevron Corporation.  It also will defend on several other grounds, including that recognition of the Ecuador judgment would violate Canadian public policy because (i) the judgment was based on a law that retroactively created a cause of action regarding claims that had been settled and released; and (ii) the Republic of Ecuador had continuing obligations under international law to prevent the recognition of the judgment.

The plaintiffs moved to strike all of those defenses, arguing that Chevron Corporation should not be able to defend on any grounds under applicable law.  The plaintiffs argued that Canadian law strictly limited the defenses a judgment debtor could bring in a recognition action and that since all of Chevron Corporation’s allegations had already been determined by the Ecuadorian courts, they could not be re-litigated in Canada.  In essence, the plaintiffs asked the court to rubber stamp a fraudulent judgment.

In response, Chevron argued that the determination of a corrupt court is a nullity not entitled to any subsequent deference or respect and that once fraud infects the court, there can be no subsequent cleansing of that fraud either during trial or on appeal. 

In its January 20th decision, the court agreed.  Specifically, the court held that Chevron’s core "allegations of fraud, corruption, bribery, ghostwriting and the overall corruption of the Ecuadorian judicial system" were "permissible defenses" and, if true, would render the judgment incapable of recognition in Canada.  Op at ¶¶ 99, 102.  The decision itself demonstrates the illogic of the plaintiffs’ position: the court noted that during oral argument even the plaintiffs’ counsel had conceded that allegations of judicial bribery and ghostwriting would be permissible defenses against recognition in Canada.  Op at ¶ 98.  The court also held that Chevron could challenge the jurisdiction of the Ecuadorian court since a finding of judicial bias "retroactively renders all the decisions and orders [of the court] void and without effect" thus, if Chevron’s allegations are shown to be true the Ecuadorian judge had no jurisdiction to render the judgment. The court did strike Chevron’s defenses based on the retroactivity of the Ecuadorian law and the Republic of Ecuador’s violation of international law, but ultimately rejected the plaintiffs’ attempt to prohibit Chevron from defending itself. 

Fundamentally, the decision is an important victory for the rule of law.  It makes clear that a recognition court is not simply a rubber stamp, but that it must satisfy itself that the foreign court was fair and impartial.  And importantly, where the foreign court itself is implicated in the fraud, no appeal can right that wrong.  The decision strengthens a key principle for the rule of law: the judgment of a corrupt court is no judgment at all–it is not worthy of respect or deference by other courts.  In the words of the Ontario court, it is "void and without effect."  Op at ¶ 101.