Can Chevron avoid paying clean-up costs by hiding behind shell companies?

[ Re-posted from The Huffington Post ]

Everybody knows that you bury a bad news story by putting it out late on Friday afternoon. If it’s really bad, you might look for a Friday afternoon that is also drowning in other news stories — like, say, the inauguration of a reality-TV star as U.S. president.

The news that came out Friday from the Superior Court of Ontario, where Ecuadorian communities are trying to enforce an Ecuadorian environmental judgment against fleeing polluter Chevron Corp., was actually a mix of good and bad. But the bad part was ugly. In the decision, Judge Glenn Hainey excused Chevron’s Canadian subsidiary (Chevron Canada) from the action, holding that it even though it is wholly-owned and controlled by Chevron (through a chain of wholly-owned, non-operational shell companies), it was not an “exigible” asset of Chevron that could be taken to satisfy Chevron’s debt to the Ecuadorians. In what is perhaps the latest flourish in the corporate personhood movement that brought us Citizens United, the court held: “Chevron Canada is not an asset of Chevron. It is a separate legal person. It is not an asset of any other person including its own parent.”

Judge Hainey essentially ruled that a multinational fleeing a valid court judgment that hides its assets in a maze of paper subsidiaries can completely insulate itself from paying its obligations, while losing nothing in terms of profit or control. While the Ecuadorian communities who have battled Chevron for 24 years can be trusted to push past this nonsense and find ways to ensure full collection of their judgment, the decision stands as a dangerous precedent for the many other corporate accountability claims that are currently underway in Canadian and other courts. It says to those claims that even if you prevail at the jurisdiction and the merits/liability stages, and even if you sustain your victory on appeal, here is yet another barrier that could prevent you from merely collecting on a successful judgment. The chill this could cast more broadly on efforts to enforce human rights norms is obvious.

The Ecuadorians are in Canada, remember, because Chevron pulled all its assets out of Ecuador when it realized it was going to lose after a robust, eight-year environmental damages proceeding. (It lost because the evidence against it was overwhelming: hundreds upon hundreds of open-air oil waste pits that, Chevron cannot deny, were built by its predecessor Texaco as the operator of a concession, and were literally designed to overflow into local waterways and drinking water sources, expressly rejecting along the way common sense environmental measures that, for a few million dollars, would have protected the lives of tens of thousands of people.) Even before the judgment against it was affirmed on appeal and by Ecuador’s Supreme Court, Chevron declared it would never pay (which by itself is illegal and contrary to the rule of law, we should not forget) and instead, with an army of literally thousands of lawyers and operatives, launched a massive demonization campaign to recast of the global public narrative about the case, framing the life-long social justice activists who led the case as a greedy and villainous fraudsters, the affected communities themselves as either “irrelevant” (as Chevron has described them) or criminally complicit, and Chevron itself as the true victim of the whole situation. Sadly, but perhaps not surprisingly, U.S. courts, and the legal media, ate it all up.

So the Ecuadorians wind up in Canada, in exercise of their fundamental right to enforce their judgment wherever they choose. (Disabusing Americans and their institutions of the deeply-held belief that a favorite son like Chevron can do no wrong is not water the Ecuadorians have any obligation to carry.) In Canada, the Ecuadorians are not arguing liability—that was already decided in Ecuador. They are simply seeking enforcement against Chevron’s assets in the jurisdiction, namely Chevron Canada. The issue in this context is not the more well-known doctrine of “piercing the corporate veil.” The issue is simply debt collection. Canada has a statute designed to speed the execution of final money judgments, which broadly allows the court “to seize and sell any equitable or other right, property, interest or equity of redemption in or in respect of any goods, chattels, or personal property.” The Supreme Court of Canada has been clear that the law must be interpreted broadly to empower the courts to “facilitate the collection of a debt within the jurisdiction”; the law “calls for assistance, not barriers.” The Supreme Court—in this very case, which already took a trip up there on appeal on almost the same issue—held that a legitimate and “core” aspect of the communities’ case “is for the enforcement of Chevron’s obligation to pay the foreign judgment using the shares and assets of Chevron Canada to satisfy its parent corporation’s debt obligation.” None of the requirements of the corporate veil-piercing doctrine (exercise of dominion and control, abuse such as undercapitalization) are even relevant; the question of what the corporate subsidiary did or didn’t do doesn’t even get asked. The subsidiary is simply an asset of the parent, held (or beneficially owned) by the parent and thus available to satisfy a debt owed by that parent.

There isn’t much wiggle-room here, but somehow Judge Hainey avoids what should have been an easy decision in the Ecuadorians’ favor. How exactly he does this is a bit confusing. While he makes the extraordinary claim quoted above, suggesting that subsidiary corporations are not assets even of their direct corporate parents, he never returns to this notion. Ultimately, he appears to rely on the chain of wholly-owned shell companies in various jurisdictions around the world that technically lie between Chevron and Chevron Canada. These are truly paper-only shells without employees, offices, operations, or any other substance; as memorably described by Chevron’s expert witness on its own operations, Chevron’s subsidiary structure “varies literally on a daily basis. . . . we create and dissolve companies constantly.” The law looks past such pass-through forms to the real “beneficial owner” of assets all the time, in countless contexts. And Chevron doesn’t deny that it is the exclusive “beneficial owner” of 100% of Chevron Canada.

Hainey throws up a lot of smoke to avoid saying outright that he is embracing Chevron’s use of these unapologetically substance-less shells as a defense to beneficial ownership. He cites a Canadian case for the proposition that a corporation’s “shares confer no right to its underlying assets”—but this is beside the point, because the communities were seeking the shares themselves as the property. It repeats many times that “the Execution Act, which is a procedural statute, does not create any rights in property” and “does not give Chevron any interest, beneficial or otherwise, in the shares or assets of Chevron Canada.” But no statute need give Chevron anything—it already owns (beneficially) the shares; the procedure provided by the Act is all that is needed. Hainey then cites three cases that he claims made findings similar to his: two are completely inapposite, involving either a normal veil-piercing analysis or involving substantive, non-shell companies; the third appears to be an outlier, in which the court in its discretion declined to seize certain subsidiary company accounts, but certainly never laid down any rule saying courts could not do so.

The court weakly tries to distinguish the multiple cases cited by the communities where Canadian courts have looked past shell-company formalities to beneficial ownership, finding irrelevant differences or dismissing them based on circular or conclusory reasoning. For example, one case was accurately described by the court as “involv[ing] the enforcement of a recognition order against bank accounts and real property [which was not just held by a shell company, but by an operating charitable foundation] that were determined by the court to be beneficially owned by the judgment-debtor.” But Judge Hainey’s response, in its entirety, is that the case “does not support the plaintiffs’ position that the Execution Act creates substantive property rights.” As just noted, that’s not the plaintiffs’ position. Hainey studiously ignores the fact that the case is directly on-point with respect to beneficial ownership (indeed makes its beneficial ownership finding with citation to the Execution Act). Hainey claims another case is distinguishable because the debtor in that case “had a legally recognized residual interest in the shares,” whereas “Chevron has no legally recognized interest in Chevron Canada’s assets.” This either misleadingly focuses on Chevron Canada assets as opposed to Chevron Canada itself, as already discussed, or is once again conclusory, simply ignoring Chevron’s clear beneficial ownership interest in Chevron Canada itself.

It’s a lot of effort to get to a bizarre, unfair, and dangerous result. If companies can completely insulate themselves from having to pay their debts simply by holding assets in meaningless shell companies, then, in the era of Mossack Fonseca, we might as well drop the idea of debt collection entirely, at least for strategically organized multinational corporations. Remember, we are not talking about arguably difficult and policy-laden questions regarding the responsibility of parents for the conduct of their subsidiaries, as we are in the context of liability. Here liability is established; we are just talking about how to enforce as a practical matter what the justice system has already ordered.

And why all this Herculean effort by the court to drop Chevron Canada? This question is particularly pressing given that the court appears to recognize that it can’t toss the case entirely after the Canadian Supreme Court expressly said the case can and should proceed. So Hainey allowed the case to proceed against Chevron, the U.S. parent that doesn’t have any assets in Canada (aside from Chevron Canada, of course). As news of the decision goes around, I keep getting the question: what’s the point? Why recognize a foreign judgment if there are no assets to enforce against?

This is where the not-so-bad and even good part of the decision comes in. The Supreme Court of Canada has already answered the what’s-the-point question and has said, basically, it’s none of our business. If the communities want to recognize the judgment in Canada, that’s their right. There is a lot of wisdom in this position. First of all, the Ontario court’s obsequious embrace of Chevron’s shell-company strategy might well be overturned, in which case Chevron Canada returns to the picture as an “exigible” asset. Even if this were not to happen, there might be other discoverable assets of Chevron in Canada, and there may be opportunities available through reciprocal procedures with other countries. Moreover, recognition of the judgment by Canada could provide a critical counterweight to the shameful interference in the process by U.S. courts, which famously—and conveniently in favor of “a company of considerable importance to our economy” (in the words of the presiding district court judge)—accepted jurisdiction in a collateral “civil racketeering” or RICO lawsuit against the Ecuadorians and their lawyers, accepted paid-for “fact” testimony from Chevron, denied the defendants a jury after Chevron dropped all money damages in the case, and then went ahead anyway and declared the Ecuadorian judgment to be fraudulent.

For these reasons, the affected communities who won the judgment are actually celebrating the Ontario decision for its basic affirmance of their right to enforce their judgment in Canada, no matter how long that might take. “The bottom line is that we are now one big step closer to our goal in Canada of forcing Chevron to comply with the rule of law and be held accountable for its environmental crimes in Ecuador,” said Carlos Guaman, the leader of the Amazon Defense Coalition, the grass roots organization that brought the Ecuadorian lawsuit and is responsible for collecting on the judgment and implementing a court-ordered remediation of the pollution.

The affected communities have spent 24 years fighting through initial dismissals, forum transfers, a strenuous eight-year trial on the merits, multiple layers of appeal in Ecuador, and a multiple layers of appeal on preliminary issues in Canada. And while these 24 years have required much sacrifice, they have also seen great victories: the communities have a final $12 billion judgment, they have been celebrated by the Goldman Environmental Foundation and many others, and Chevron’s pollution has been exposed in almost every leading media outlet in the world. Indeed, the communities themselves have only grown stronger over the many years of struggle.

The communities apparently still have a road to travel to recover on their judgment in Canada, but they are getting ever closer.

 

Huff Post BHR Blog Series Complete

The fifth and final installment of The Huffington Post blog series on Business & Human Rights is now live here. A page describing the series and linking to each part is here.

I have been getting great feedback about it, and it is clearly spurring important discussion — including a formal review process established by the Business & Human Rights Resource Centre to gather a wider range of opinions about some of the issues I raised about its Company Response mechanism in Part IV of the series.

 

Advocacy & analysis, litigation & arbitration: A response to Roger Alford

My response to Roger Alford’s recent post on Opinio Juris, in which he highlights a letter he wrote with colleagues in response to an earlier letter by other law professors (hosted or published by the Alliance for Justice) on issues of investor-State arbitration in the run-up to upcoming debates about TTP and TTIP/TAFTA.  As I note, the debate itself is an important and urgent one — but Alford’s attempt to elevate himself and his views to some privileged privileged position of truth above “political advocacy” is grating and unconvincing.

While I’m not surprised that the author of one letter thinks his letter is better than his opponents’, I think Mr. Alford goes too far by dismissing what he calls the Alliance for Justice letter as “political advocacy,” while characterizing his own as “a memorandum by scholars offering legal analysis.”  I would say both are 80% the former, 20% the latter.

The “analysis” provided by the Alford letter, as I read it, is that the world of international investment disputes is simple and objective: when a state has acted badly, it will be held liable; when it hasn’t, it won’t.  What’s the problem?

The problem is that litigation is litigation, even when it’s arbitration.  While “objective” facts matter, the system is driven by a competitive inter-subjectivity where the parties’ underlying resources and commitment to the dispute are often (some would say always) determinative of the outcome.  States can be trusted to continue to claim they act in the global public interest; corporations can be trusted to aggressively and creatively package state regulatory actions as arbitrary, discriminatory, etc.  The “truth” can be trusted to continue reside somewhere in between.

The case Alford et al choose to highlight as an example, S.D. Myers, is an example indeed.  Alford et al suggest that this is an easy case of state discrimination, asserting that the objective truth is that “Canada’s goal in imposing the [PCB export] ban was not to protect the environment, but to protect Canada’s PCB waste disposal industry, as acknowledged by Canada’s Minister for the Environment in a speech that she gave to the House of Commons.”

In fact, the ban was the product of more than a decade of deliberation by numerous Canadian authorities involving numerous complicated factors and considerations, including as just one example whether the ban was required for compliance with the Basel Convention.  The gloss in Alford’s letter would throw all this out this window in favor of a “truth” purportedly revealed when a cabinet minister, who was obviously not solely responsible for the ban, responded to a question during a parliamentary session with the off-the-cuff summary that “it is still the position of the government that the handling of PCBs should be done in Canada by Canadians.”  I’m not saying this remark was not a legitimate piece of evidence, but playing it for its “ah ha” value, as Alford et al do and as the claimant did in the arbitration, is an example of litigation — and advocacy — that should remind us that we know this process (and its relation to truth) all too well.

And in fact, even accepting the “in Canada by Canadians” position as the government’s official position doesn’t turn the case into a simplistic story of greedy nationalism.  That policy, to the extent it played a role, was substantively justified by the state’s legitimate interest in maintaining capacity and control in an area critical to citizen and environmental health and safety, especially in light of the possibility that the U.S. disposal facilities might become unavailable or were the border to be closed, which had happened  in the past.

The Alford letter tries to take the AFJ letter to task for focusing on what “might” happen.  It’s response, apparently, is to tell us with resounding confidence, is a standalone paragraph, what ”will” happen:

“Corporations cannot and will not gain victory simply by arguing reduced investment value. Rather, legitimate government conduct will be upheld as a proper exercise of sovereignty.”

Great!  We’re done then.  Or perhaps not quite, because how do we know this will happen.  It actually does tend to happen this way in the United States with respect to takings claims under the U.S. Constitution, but that’s because we have a strict interpretation of the takings clause by the highest court in the land, which interpretation is binding on all other (federal) courts, i.e. Tahoe/Lucas/Penn Central and the requirement that only “permanent obliteration of value” can result in a finding of regulatory taking.  Not only is there not a similar doctrine in international investment law, but the disaggregated system as currently established would be incapable of developing and enforcing it.  It could be included in the text of any upcoming treaty, but the leaked treaty texts see the them going in the other direction, setting up a system where regulatory acts will be evaluated according to their “legitimacy” – again, in a disaggregated system where each panel decides for itself, expressly not bound by any larger system of jurisprudence  or higher authority.

This is one of the reasons the AFJ letter complains of the lack of an appeals process.  The Alford letter respond that at least in the ICSID context there is the annulment process.  But  it acknowledges that annulment is available only where the arbitrators have “manifestly exceeded their authority or departed from a fundamental rule of procedure.”  This is akin to the standard for issuance of the writ of mandamus in the common law.  If we were to ditch the availability of appeal in this country and say, let’s just use mandamus to correct the most egregious cases, I doubt people would be satisfied with this as sufficient due process.

It’s also worth noting the details of the Alford et al assurance that states will have to pay foreign corporations for exercise of state regulatory functions “only if their acts are arbitrary, discriminatory, or otherwise violate the investment guarantees to which states have previously agreed.”  Pay attention to that last clause.  Countless tribunals have read “umbrella clauses” into investment treaties, meaning that any violation of even a purely domestic contract by the state thus gives rise to international liability under the treaty.  So we end up back in the realm on typical commercial contract litigation – except, as the AFJ letter notes but the Alford letter ignores, it’s a one-way street, because system only allows corporations to sue states, not vice versa.

We cannot blind ourselves to the fact that litigation often has a strategic dimension. Companies file lawsuits to pressure their opponents to settle, or to improve their negotiating position in ongoing and evolving relations.  Indeed settlement is probably the dominant feature of commercial litigation, where cases almost never go to trial.  Corporate claimants are certainly aware of this, and have particularly powerful leverage in the form of the system’s built-in sky-high costs and fees.  Remember, in arbitration you’re not just paying for counsel, you’re paying for the judge – in fact for three of them, and typically around $1,000 an hour.  The tribunal wants to hold a motions hearing?  That’s probably $20,000 just to get started, not counting travel and other expenses.   A two-week trial?  Do the math.  And while the U.S. has a fantastic in-house lawyers teed up and ready to litigate these cases, most countries don’t, and end up having to go to the club of elite law firms who specialize in this work and charge correspondingly elite-level fees for the privilege.

The issue of settlement raises particular concerns in the sovereign context because it goes beyond the issue of states using taxpayer money to pay off potentially meritless corporate claims.  States will often be tempted to “settle” a claim by revising the challenged regulation to suit the claimant.  The Alford letter faux-naively suggests that the regulatory taking concern is limited because “nothing in investment treaties requires states to change their domestic regulations” – instead, they can just pay damages.  Come on.  The idea that states are free to keep regulations on the books and just happily pay off private parties (at whatever damages figures those parties’ lawyers can sell to private tribunals) for the privilege is ridiculous.   The budgetary issue will almost always be determinative – by law, every regulation in the US is rigorously evaluated for its budgetary impact – and corporations know it.

As to a number of other issues in the AFJ letter, the Alford letter just ignores them.  The controversial cases such as Philip Morris’ tobacco labeling challenges or the gold-mining cases in El Salvador?  No comment.  The rotating lawyer/arbitrator system, in which a tiny club of individuals sit on panels and represent parties before those panels?  No comment.  The fact that arbitration often allows corporations to bypass domestic court systems?  No comment – except that the letter cites (for a different proposition) the BG Group case, where it was eventually decided that arbitrators were within their rights to relieve a claimant of the requirement to exhaust domestic remedies, even though that requirement was expressly stated in the treaty.

Alford is right that these battle lines are not new.  But his suggestion that he and his colleagues are not part of the fray, or are somehow above it – that his letter is “legal analysis” while his opponents only offer “political advocacy” – is unconvincing.  Just like litigation is litigation, advocacy is advocacy – it’s the butter on the bread of public discourse and Alford is more than welcome to spread it as thick as he likes.  But I for one can’t believe it’s not butter.

access to information

At the international level, the rights of listeners and receivers of information are expressly protected along with and in equal measure to the rights of speakers.  While the right to receive information has many facets, in practice it has emerged most powerfully from the proliferation of Freedom of Information and other access-to-information laws now in place in over 90 national jurisdictions.  Indeed, it is now a basic tenet of international law that individuals have a concrete right to access government-held information, subject to certain enumerated exceptions such as security and individual privacy.  This right, like the right to free expression generally, is a critical “gateway” right necessary to protect other fundamental democratic rights such as public participation and government accountability and anti-corruption.  As the Supreme Court of India has stated, “[w]here a society has chosen to accept democracy as its creedal faith, it is elementary that the citizens ought to know what their government is doing.”  Even more succinctly stated by the Inter-American Court: “a society that is not well-informed is not a society that is truly free.”

The right to access information can also serve as a critical gateway right to the protection of a range of other rights pertaining to health, land, natural resources, FPIC, self-determination, and more.  Information is power, and too often information disparity is used to further marginalize and manipulate affected individuals and communities.  The right to access information can extend to information of critical importance to protecting one’s right, irrespective of who holds the information, especially in cases where private parties are allowed by government through “indirect methods or means” to exercise control over information of a fundamentally public or rights-concerning nature.

Through its counsel, consulting, and communications practices, Forum Nobis works with affected individuals and communities to gain access to critical information through Freedom of Information petitions, legal cases, and other available means.  Forum Nobis has particular experience fighting efforts by governments and corporation to withhold critical public information under the pretext of “trade secret,” corporate privacy, or similar rationales that may in application be inconsistent with the right to access information.

 

— see: news and commentary related to access to information —