Lago Agrio: Chevron Prevails In Ontario Court of Appeal

Oil barrels in Ecuador

The Court of Appeal for Ontario has affirmed the Superior Court’s decision holding that the Lago Agrio plaintiffs cannot reach the assets of Chevron’s indirect subsidiary in Canada to satisfy the judgment against Chevron they obtained in Ecuador.

In my September 2016 post and in my comments responding to a comment by LAP advocate Aaron Marr Page, I suggested that Chevron would win on basic corporate separateness grounds. That’s just how the case played out. Though of course I’m not a Canadian lawyer, I thought the legal issues were pretty easy, and so I am not going to do a thorough review of the decision here. The key points, I think, are these:

  • The shares of Chevron Canada’s stock could not be reached on execution, because they are not the property of Chevron Canada, the party whose property the LAPs were seeking to take. Indeed, under Canadian law, they cannot be the property of Chevron Canada.
  • The LAPs could not reach the property of Chevron Canada, either, because it is the property of Chevron Canada, and the LAPs have no substantive claim against that entity.
  • The LAPs could not show that the court ought to have pierced the corporate veil, because they could not allege that Chevron’s corporate structure was “designed or used as an instrument of fraud or wrongdoing.”

Perhaps the most important point is that the court recognized that in the ordinary course, the LAPs would seek to enforce the judgment in the United States, and that the reason they weren’t doing that was that the US courts had found their counsel guilty of fraud and enjoined counsel (and perhaps the LAPs themselves) from seeking to enforce the judgment in the United States:

[79] The appellants further submit that the corporate separateness of Chevron Corporation and Chevron Canada should be ignored for policy reasons. Yet they provide no guidance regarding the basis upon which it will be appropriate to pierce the corporate veil in future cases. Once the Transamerica test is jettisoned and no principled basis for piercing the corporate veil replaces it, we are left with a purely ad hoc test. In the end, Mr. Lenczner’s submissions boil down to an exhortation that we should do the right thing for his clients, untethered to the jurisprudence, the statutory rights of corporations, or any discernible principle. Even if we were free to do that, which we are not, this case illustrates the difficulties with this approach. At this stage, the equities of this case are far from clear. On the one hand, the appellants have suffered devastating loss through no fault of their own. On the other, on the finding of the United States courts, the Ecuadorian judgment against Chevron Corporation was the result of a massive fraud.[5]

[80] It is also important to remember the context in which the request to pierce the corporate veil is being made in this case. It is common ground that the judgment debtor has more than enough assets to satisfy the Ecuadorian judgment. This is also not a case where the judgment debtor’s assets are being funnelled to a related corporation and as a consequence the judgment creditor cannot execute on its judgment. In fact, the appellants allege that the opposite is true. They say the profits of Chevron Canada are being funnelled up to Chevron Corporation as dividends. If they are correct, Chevron Canada is actually enhancing the ability of Chevron Corporation to pay the Ecuadorian judgment.

[81] As noted above, the appellants’ submissions fail to acknowledge that the real fact driving their appearance in the Canadian courts is that they have not enforced their judgment in the United States. The reason for this seems clear, but in his oral submissions, Mr. Lenczner stated that the existing United States court order does not prohibit his clients from enforcing the Ecuadorian judgment, whereas in his factum filed on the costs appeal he asserted that his clients are prohibited from enforcing that judgment in the United States. Query if there truly is no prohibition, why he is in the Ontario courts making novel legal arguments to get at the assets of a seventh level subsidiary?

[82] Whatever the reason for not enforcing the Ecuadorian judgment in the United States, it is clear that the difficulties the appellants are encountering in collecting the judgment are not related to Chevron Corporation’s structuring of its subsidiaries. What we are really being invited to do is to assist the appellants in doing an end-run around the United States court order by breaking with well-established jurisprudence and creating an exception to the principle of corporate separateness that is both ill-defined and will be unnecessary for similarly situated judgment creditors.

Note, however, that the court said expressly that it had not adopted Judge Kaplan’s findings of fact. And note, with respect to ¶ 81, that the question whether the US judgment forbids the LAPs from seeking recognition in the US is somewhat complicated. There was no claim for recognition of the Ecuadoran judgment in the case; on the other hand, the judgment enjoined Donziger and the two LAP representatives who participated in the case from seeking to profit from the Ecuadoran judgment and imposed a constructive trust on any proceeds. In recent days the New York court entered a default judgment against the LAPs who did not participate, though I suppose that judgment is subject to appeal on jurisdictional grounds. But after the Second Circuit vacated the preliminary injunction against the LAPs in 2011, it’s clear that the LAPs has years to seek recognition in the United States but didn’t do it, and I think it’s clear that they didn’t do it for strategic reasons.

As I noted in my description of the oral argument, the LAPs sought to introduce new evidence about Chevron’s tax strategies. The court refused to hear the evidence, on the grounds that it would have had no effect on the decision.

Justice Nordheimer concurred in the decision. He thought that there might be cases where a court should ignore the ordinary rules of veil-piercing on equitable grounds; but he concluded that in light of the outcome of the US RICO suit, this was not such a case:

On the one hand, we have an apparently valid foreign judgment. On the other hand, we have a finding by the U.S. courts that the judgment was obtained by fraud. Comity demands that this court, at this stage, should respect both decisions. But, at the same time, we must recognize the obvious conflict between them. Because of the manner in which this matter has proceeded, our courts have not yet been called upon to make their own determination of the validity of the Ecuadorian judgment. Absent such a finding, even on my approach to the judgment enforceability question, the circumstances here cannot rise to the level that would be necessary to conclude that the result is “too flagrantly opposed to justice” as to permit the corporate veil to be pierced.

The LAPs have promised an appeal to the Supreme Court of Canada. I will try to have some more detail soon about the prospects for an appeal soon—as with the US Supreme Court, the Canadian Supreme Court has to decide to hear cases appealed to it. I will also have an update tomorrow on some additional, less significant developments in the overall Lago Agrio saga.

4 responses to “Lago Agrio: Chevron Prevails In Ontario Court of Appeal”

  1. Peter Lynn

    Hi Ted—Interesting that one of the Justices seems to have a different take on it, arguing that the Transamerica test should only be applied to liability proceedings rather than enforcement. His argument seemed to be favouring the LAPs, although ultimately it was the RICO findings (which the Canadians have up to now said very little) that led him to concur. Although success in Canadas Supreme Court looks unlikely, if they were to follow this argument and decide to make their own determination of the validity of the Ecuadorian judgement, then maybe it’s not dead yet.

    1. Yes, it’s possible. I think the strongest answer, though, to the concurrence is the point the court made in ¶ 80: Chevron Canada was not taking money out of Chevron Corp. in order to help it evade a judgment; the plaintiffs themselves argue that Chevron Canada is putting money into Chevron Corp. So in a sense this is the opposite of a case where equitable principles would make veil-piercing appropriate.

  2. […] point is worth thinking hard about in light of, for instance, the Ontario Court of Appeal’s decision in the Chevron/Ecuador case, which held that judgment creditors of a US parent corporation could […]

  3. […] Court of Canada denied an application by the Lago Agrio plaintiffs for leave to appeal from the decision of the Ontario Court of Appeal in May 2018, which held that the Lago Agrio plaintiffs cannot reach the assets of Chevron’s […]

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