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.

 

Endless Litigation Dept. (cont.)

As has been recently reported (Vice, Courthouse News) the arbitral tribunal hearing Chevron’s baseless “denial of justice” claim against the Republic of Ecuador (through which Chevron hopes to put Ecuador “on the hook” for the environmental judgment that private Ecuadorian plaintiffs won against Chevron in Ecuador’s courts) conducted a series of “judicial site inspections” of the abandoned waste pits and other contamination at Chevron’s former oil operations sites in the Ecuadorian Amazon. The transcripts of the inspection proceedings are available here.

For someone who was intimately involved in the judicial inspections process in the original case back in 2005-2006, reading the transcripts is an experience thick with déjà vu. The same scene: roosters crowing, sudden torrential rains, heat and insects, strained jokes about trying to hold it all together in a jungle setting. The same arguments: the open pits, the hidden pits, the produced water dumping system, the bogus remediation; and from Chevron: the RAP, the RAP, the RAP (i.e., the settlement which Chevron pretends released it from taking responsibility for the majority of the contamination, except that the private claimants in the Ecuador case were not party to it and in fact it expressly stated that it did not apply to their claims).

In between now and then, the same sites — ridiculously obviously contaminated sites — have been examined again and again and again and again, by government investigators, expert teams for various parties in various litigations, various human rights delegations, and countless celebrity and other observers. How long can Chevron continue to drag the world through this charade?

After enough people visit, will we at some point reach a critical mass? As Ted Folkman at Letters Blogatory astutely writes, “there is a bit of res ipsa loquitur that works in favor of the Ecuadoran position” when a person leaves the safe confines of the United States (where Chevron has successfully tainted the story of the Ecuador case with a blizzard of false allegations of fraud and wrongdoing) and arrives to see the pits themselves in all their horrible glory. “There are, of course, experts on both sides of the case, but when you are at the pit, you can see the oil, and a layman can simply look at the topography of the site and see how the oil would likely migrate.”

In fact, with all respect to Ted, what most people see is not migration of contaminants, but toxicity, sickness, and death, especially if their visit is combined to any degree with discussions with local residents about their invariably tragic family histories. To the extent most peoples’ thoughts stray into the legal realm, they typically start with questions of criminality, recklessness, negligence, and a commensurate call for justice.

A decade ago, shortly after I left full-time work on the case, Chevron made a public promise that it would inflict “a lifetime of appellate and collateral litigation” on the plaintiff communities if they dared to continue with their case and push it through to judgment. One cannot argue that an oil company like Chevron is not wise in the ways of the world and the halls of power; it knew it could inflict just such a fate, and it has.

Chevron has laid its cards on the table. It knows what it is doing. Now it’s our turn — “our” most broadly, basically everyone in society who is not Chevron or a reflection of its bottomless self-interest. What are we doing? The world will have to change if this company is going to change course. Maybe it is changing already.

Just clean it up, for f***s sake

Cracks In Chevron’s “Fight On The Ice” Strategy

Nearly a decade ago, Chevron Corporation issued a public statement warning the Ecuadorian communities who were plaintiffs in a massive environmental case against the company in Ecuador that they would face “a lifetime of appellate and collateral litigation” if they continued to vigorously pursue their claims.  A few years later, perhaps thinking they hadn’t been understood, Chevron sharpened the message, telling a reporter on record that regarding the claims, which demanded compensation sufficient to remediate hundreds of pond-sized pits of oil sludge and the effects of the 18 billion gallons of wastewater that even the company admits it dumped during 25 years of operations in the Ecuadorian Amazon, the company would “fight until hell freezes over . . . and then we’ll fight it out on the ice.”

I’ve worked with the Ecuadorian communities on the plaintiffs’ side of the case for over a decade now.  Though I was on a sabbatical of sorts when Chevron first made these promises, I was aware of them but didn’t think much except that it confirmed my beliefs that the company was fundamentally piggish and brutal and would need to undergo deep reforms before it would do the right thing.

Looking back, I see things more clearly.  For Chevron, hell froze over on February 14, 2011, the day a small provincial court in Ecuador—the sort of country Chevron in its heyday used to treat like a private hacienda—issued a massive environmental verdict against the company.  The “ice,” which had been gathering for a year or so as Chevron saw the verdict coming, then followed.  The scale itself is impressive, epochal: dozens of lawsuits against the Ecuadorians’ lawyers and consultants (including myself); lawsuits against every funder of the Ecuadorians’ effort, including in faraway jurisdictions like Gibraltar; a “racketeering” lawsuit against the case’s leaders that the company pushed all the way through a seven-week federal court bench trial in New York; a decade of ferocious litigation against the government of Ecuador itself, under the U.S.-Ecuador Bilateral Investment Treaty, claiming a “denial of justice” in the refusal by Ecuador’s executive branch to quash the case.  All this advanced by a team that included, Chevron told a federal judge a few years back, several dozen law firms and literally thousands of lawyers and operatives.

But the “ice” was more than that—colder, more biting, and more isolating than I could have imagined.  It was, at bottom, a wrenching recasting of the global public narrative about the Ecuador environmental 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.

Chevron’s success in propagating this counter-narrative (a fundamentally false one in my view, for reasons I’ll get to) was either stunning or inevitable, depending on what you think about the depth of corporate influence in our society.  Admittedly it was sped along its way by some mistakes and some hubris by the Ecuadorian team—although nothing that couldn’t be, and in fact was, “cured” by appropriate processes in the environmental case itself, and certainly nothing in comparison to what even Chevron’s staunchest supporters admit in private that you’d likely find if you were allowed to scrutinize its private files to the same extent as was allowed as to the Ecuadorian side.  Chevron’s success, while certainly propagated in “traditional” means by Chevron’s juggernaut public relations and government lobbying efforts, really hit its stride through innovative deployment of private institutions not traditionally associated with public narrative processes, such as white shoe law firms like Gibson Dunn & Crutcher, and, through them, its successful deployment public institutions including and no less than the court system itself.

I recognize this is a striking claim.  The court system did not just roll over for Chevron—plenty of courts pushed back, rejecting Chevron’s “crime-fraud” claims against the Ecuadorians and even calling out the problematic First Amendment implications of Chevron’s counter-attack.  But Chevron’s deployment of overwhelming resources changed the usual calculus of courts in the public debate.  The company filed so many lawsuits that it was able to use its massive PR machine to highlight its successes and spin away its losses.  It filed so many lawsuits it was able to “audition” literally dozens of judges, so that when it found a winner—such as the New York judge who began a preliminary hearing by railing against the “giant game” he thought the Ecuadorians were playing and bemoaning the influence of “imaginat[ive]” plaintiffs lawyers on the national character (“You know, we used to do a lot of other things [in this country]”)—it could double-down and throw resources in that direction.  A source close to the company estimated two years ago that the lawsuit that Chevron subsequently initiated in front of that New York judge was costing $400 million per year in legal and related fees.

In 2009, Chevron’s lead strategist noted in an internal email that the company’s “long-term strategy” in responding to the Ecuador case was to “demonize” its opponents, in particular Steven Donziger, my longtime colleague and a social justice activist who has dedicated much of his career to the Ecuadorian cause for over two decades now.  If you review the media coverage of the case and Donziger in the last five years, it’s hard not to come to the conclusion: job well done.  I’ve had a lot of support from friends and family over the years I’ve worked on the case, but most of the people who support me, and who I know otherwise support the Ecuadorians in their struggle for justice, don’t even follow it anymore.  They know the contamination is still there, the human suffering is still there.  They just don’t recognize the headlines.  And from some people who used to support the case, or who I would have thought would support the case, there is an icy silence.

But the ice may, finally, be cracking.

A huge driver of the thaw, if it comes, will be what the federal Court of Appeals for the Second Circuit does with the Ecuadorian’ pending appeal from the “racketeering” judgment against them entered by the aforementioned New York judge last year.  The U.S. media and the public generally, for generally good reasons, has a deep faith in the federal court system.  If the Second Circuit lets the racketeering judgment stand, I and my colleagues, knowing all the facts that the New York judge blocked from coming into the record during the fall 2013 bench trial, will know it as a travesty of justice.  But the rest of the country will see it as a duly considered matter—case closed.  (What courts in the rest of the world would think is an open question.)

But conversely, if the Second Circuit vacates the racketeering judgment—and oh my does it have plenty of good reasons to do so—the significance of Chevron’s racketeering case pivots.  It still remains relevant, but not as a question of what the Ecuadorians did or did not do in Ecuador.  It becomes a question of what Chevron did, on a global scale and at mind-boggling cost, in responding to its Ecuador liability not by taking responsibility but by instigating a massive retaliation campaign against its own victims based in large part on distorted, even invented evidence.  This is not an overstatement: as has been discussed elsewhere and will be detailed in future blogs, Chevron literally paid cash to “fact” witnesses for key testimony that it must have known could not be true, and that emerging evidence may conclusively prove to be untrue.

Our federal courts’ and our society’s willingness to embrace Chevron’s counter-narrative, even temporarily, raises important further questions.  In my view, it speaks to our persistent longing to believe that our society’s most powerful private institutions—not just oil companies and white shoe law firms, but, in other contexts, big banks, media conglomerates, technology companies—are “too big to lie,” are fundamentally good at heart, or otherwise can somehow be trusted to protect the public interest even as they pursue their private ones, without the draining exercise of regulation, enforcement, and constant public vigilance.  It is a longing that gets us into trouble again and again.

The Second Circuit will hear argument in the case on April 20.

There are very good reasons why, just on legal issues alone, the Second Circuit it likely to reverse the racketeering judgment.  After boasting for three years that it would take its racketeering case to a jury, Chevron dropped all its money damages claims on the eve of trial, allowing it to submit the case for decision solely to the “we-used-to-do-things-in-this-country” judge, not a jury.  But dropping damages left Chevron asking for a civil racketeering verdict based on forms of alleged injury more like hurt feelings than the sort of things that federals courts say are necessary for a plaintiff to have “standing” to proceed.  Chevron argues that because it asked for damages at the beginning of the case, it should get a pass on standing even though it later changed its mind.  That one’s not going to work.  Another glaring problem for the Second Circuit is that if Plaintiff Chevron is allowed to use the civil RICO statute as it has, an army of more typical big-money plaintiffs lawyers would use the precedent to bring actions against corporations without the hard work of proving damages, because under RICO they can recover triple attorneys fees even where no damages can be found.  The Second Circuit would turn into a haven for racketeering cases.

The law on this and a ton of other issues is so bad for Chevron that even it has started positioning itself for defeat.  As I noted in an earlier blog, Chevron recently pleaded for the Second Circuit, even if it reverses, to leave a portion of the judgment in place as a “freestanding determination of the facts,” even without legal consequence.  A nice idea—but completely unconstitutional, so long as the normal standards are being applied.  Also very unlikely in light of new developments in the form of new evidence, admittedly outside of the trial court record , which appears to conclusively show that Kaplan got the facts wrong.  Kaplan “found” that Ecuadorian judge Nicolas Zambrano did not author the Ecuadorian trial judgment but took a bribe to put his name on a judgment authored by the plaintiffs.  But a forensic analysis of the Ecuadorian judge’s hard drives apparently shows him writing the judgment, day by day, over the course of the months.  Even though Chevron is likely adapting its fraud theories to the new information as we speak, it is devastating to the company’s counter-narrative across the board.

What’s more, in Chevron’s massive international arbitration directly against the government of Ecuador, it has gotten everything it has asked for from the panel of arbitrators—until last week.  The arbitrators (who are convened by corporate investor complaints, even if they are sometimes appointed by States, meaning that they generally have an incentive to enhance the effectiveness of the arbitration forum for corporations by ruling in their favor) issued a pre-trial decision analyzing what has been Chevron’s primary defense/argument not just in the arbitration but in collateral litigation around the globe—in Ecuador, in New York, in Gibraltar, and in enforcement courts in Canada, Brazil, and Argentina.  The arbitrators concluded that the defense—that the Ecuadorians could not pursue their claims because they were barred by the terms of a 1995 release agreement Chevron worked out with the Ecuadorian government—was lacking.  The result is devastating for Chevron; the arbitration that was started as a way of bolstering its position and influencing the national-court jurisdictions that actually matter, has now turned into a liability in and of itself.  An arbitration trial on Chevron’s “fraud” facts—which as noted, are unraveling—is set to start April 20 before the same arbitrators.

Finally, there are rumors that the Supreme Court of Canada may soon authorize the Ecuadorians to begin a full-bore enforcement effort against Chevron in Canadian courts.  Other efforts to enforce the Ecuadorian environmental judgment in various countries that have been stuck in the ice the last five years are likely to break free and start moving too.

I’ll have more to say on these and other developments as we head into these important dates in April and beyond.

Some thoughts on the minutes of the Dec. 2013 “single-stakeholder” (business only) meeting at the UN Forum on Business and Human Rights

An excellent and comprehensive set of minutes is available from the Office of the High Commissioner for Human Rights.  Even though it was an exclusive meeting, the transparency provided by the reporting is admirable and helpful to the process.

The meeting was a “second pillar” meeting, i.e. addressing the obligation on business to “respect” human rights imposed by the “Protect, Respect, and Remedy” framework  of the UN Guiding Principles.

Hence the quantities of baroquely intricate corporate language, such as the first speaker’s discussion of the “period of ‘absorption’ [that] has been taking place whereby leadership companies are working to integrate the UNGPs into management systems and core business processes.”

To be fair, there was discussion of specific examples and practices.  A speaker from Microsoft described two human rights impact assessments his company conducted with respect to beginning and expanding operations in Myanmar and China, respectively.

The minutes note several efforts to think about fresh and/or practical ways to engage businesses that are not yet conceptually invested in the notion of human rights.  For example, expanding from Health, Safety & Environment (HSE) programs, which most companies have, maintain respect for, and which have an obvious overlap with key human rights areas.

Similarly, the participants note that the most progress thus far has been made via sector-specific initiatives: companies in a sector understand their shared challenges with sufficient concreteness to conceive of potential practical steps, and may have sufficient experience working with each other to get collective efforts going in a more reasonable time.  Sector-specific work is by far the most realistic possibility for meaningful results in the near future and should be prioritized. Continue reading