This is my ninth instalment about this case. It probably won’t be my last.
In the latest chapter of Yaiguaje v. Chevron Corporation,
2018 ONCA 472, the Court of Appeal for Ontario rejected arguments by the
Ecuadorian villagers who are seeking to enforce a US$9.5 billion judgment
against Chevron Corporation in Ontario. The villagers argued that the
Execution Act (“Act”) permitted execution on Chevron Canada’s
shares and assets to satisfy the Ecuadorian judgment. Secondly, they
argued that the court should pierce the corporate veil between Chevron Canada
and Chevron Corporation in order to render Chevron Canada’s shares and assets “exigible”
i.e. – subject to seizure and sale to satisfy the judgment.
Justices Hourigan, Huscroft and Nordheimer heard the
case. All three justices dismissed the appeal, however, Justice
Nordheimer wrote separate reasons which may give the Ecuadorian’s a glimmer of
hope in seeking leave to appeal from this decision to the Supreme Court of
Canada.
Background
From about 1964 to 1992, Texaco Inc. drilled for and
extracted oil in the Oriente region of Ecuador which were the villagers’
traditional lands. The oil company’s activities resulted in extensive
environmental pollution. In 2001, Texaco was acquired by Chevron
Corporation. Following an eight year trial and two appeals in Ecuador,
the villagers obtained a US$9.5 billion judgment against Chevron Corporation.
They sought to enforce their judgment in the United States. However,
Chevron Corporation obtained an order in the state of New York holding that the Ecuadorian judgment had been
obtained by fraud and preventing enforcement proceedings anywhere in the United
States. As a result, the villagers sought to enforce the Ecuadorian
judgment against the assets of Chevron Canada in Ontario. After a number
of proceedings, including a jurisdictional issue
that went all the way to the Supreme Court of Canada, the matter came back to the Superior Court of Justice
in Ontario where a motion was brought for summary judgment.
Justice Hainey, the motion judge, dismissed the villagers’ claims on both of
its arguments. The villagers appealed
the decision to the Ontario Court of Appeal.
The Execution Act
Argument
The villagers argued that section 18(1) of the Act allows
the sheriff to seize any interest of a judgment debtor and that Chevron
Corporation has an “indirect interest” in Chevron Canada. The villagers
submitted that because this case involves the enforcement of a foreign
judgment, the court must, for the reasons of comity, interpret the Act in an
expansive manner to facilitate the collection of the debt. Justices
Hourigan and Huscroft (the majority decision was written by Justice Hourigan)
disagreed. They held that enforcement of a foreign judgment is done in
accordance with domestic law. One cannot have one set of enforcement
rules for domestic judgments and a second far more expansive set of rules for
foreign judgments.
The majority held that the declaration that the
villagers sought, i.e. that the shares of Chevron Canada were exigible was “a
legal impossibility”. A corporation’s shares do not belong to the
corporation but to its shareholders. In fact, under the Canada Business
Corporations Act, corporations are prohibited from owning their own
shares. The Act, is procedural only and does not grant substantive rights
to judgment creditors. Its only function is to facilitate the collection
of judgments to enforce a judgment debtor’s existing rights. In other
words, there must be an existing legal right which permits seizure of the
assets. Chevron Canada does not hold such a right. A shareholder
(albeit indirect) of a corporation does not have a right to claim a proportionate
share of the corporation’s assets while it is ongoing. That right only
arises if and when the corporation is wound up because at that point there is
no existing entity capable of holding the assets.
Granting the order
sought by the villagers would ignore the corporate separateness of the
subsidiaries in between Chevron Corporation and Chevron Canada. In
addition, the proposed interpretation of the Act would have a significant
policy impact on how corporations carry on business in Canada. As a result,
they rejected this ground of appeal.
Piercing the Corporate Veil Argument
The villagers alternatively submitted that the court had the
ability to pierce the corporate veil “when the interests of justice demanded
it”. They relied on Justice Bertha Wilson’s passage in the Supreme Court
of Canada case of Kosmopoulous v. Constitution Insurance (“Kosmopoulous”),
when she said that the corporate veil can be lifted when to enforce it would
yield a result “to flagrantly opposed to justice, convenience or the interests
of the Revenue”.
The Court of Appeal held that Kosmopoulous was
decided thirty years ago and since that time the law has developed. In
the case of Trans-America Life Insurance Co. of Canada v. Canada Life
Assurance Co. (“Transamerica”) (decided in 1996), Justice Sharpe
held that there are only three circumstances where the court will pierce a
corporate veil: (1) when the court is construing a statute,
contract or other document; (2) when the court is satisfied that a company is a
“mere façade” concealing the true facts; and (c) when it can be established
that the company is an authorized agent of its controllers or its members,
corporate or human. The majority held that the Court of Appeal has
repeatedly rejected an independent just and equitable ground for piercing the
corporate veil in favour of the approach taken in Transamerica. The
Transamerica test is consistent with the principle reflected in the various
business corporation statutes in Canada that corporate separateness is the rule.
The majority held that it is important that the courts be rigorous in their
application of the Transamerica test because the rule is provided for in the
statute and stakeholders of corporations have a right to believe that, absent
extraordinary circumstances, they may deal with the corporation as the actual
person. It held that Transamerica effectively modified Kosmopoulous and
that the question for determination in this case is whether this court is
prepared to sacrifice certainty for the sake of expediency.
There was no suggestion or evidence that Chevron Canada was
established or used for a fraudulent or improper purpose. The majority
rejected the argument that they should in effect “do the right thing” for the
Ecuadorian villagers because at this stage the equities of the case were far
from clear. On one hand the appellants had suffered devastating loss
through no fault of their own. On the other hand, the United States court
had found that the Ecuadorian judgment was the result of a massive fraud.
The court held that what they were really being asked to do was to assist the
villagers in doing an end-run around the United States courts by breaking with
well-established jurisprudence where there is no principled basis to do
so. They dismissed the appeal on that ground as well.
Justice Nordheimer’s
Dissent
Justice Nordheimer agreed with the result reached by his
colleagues. He also agreed with their analysis of the case in respect of
the Act. However, Justice Nordheimer did not agree with the analysis of
the majority judges concerning whether to pierce Chevron Canada’s corporate
veil.
He held that Transamerica, the case that the majority had
heavily relied upon, could be distinguished on the facts. Transamerica dealt with imposing liability on
a party whereas in this situation, the issue concerned enforcing a judgment
debt. In the latter situation, liability has already been
established. The proceeding has moved past the hurdle of finding
liability to a stage that concerns the remedies that are available to enforce a
valid judgment. In Justice Nordheimer’s view, Transamerica could not
simply be lifted out of the liability context and dropped into and applied to
the judgment enforcement context. In fact, Justice Nordheimer held that it
would be very difficult to conceive of a factual situation where the Transamerica
test could be met, that is where the corporate structure would be found to have
been used as a shield for fraudulent or improper conduct solely in the context
of enforcing a judgment.
Justice Nordheimer also disagreed with his colleagues’
reading of the Kosmopoulous case and found that he could see situations where
the court would be willing to lift the corporate veil in the interest of third
parties who would otherwise suffer as a result of that choice. He found
that the Ecuadorian villagers might well fall into that category were it not
for the findings of the United States courts respecting the fraudulent manner
in which the judgment had been obtained. In Downtown Eatery (1993)
Ltd. v. Ontario (“Downtown Eatery”), a 2001 decision of the Court of
Appeal, the court pierced the corporate veil despite expressly finding that
neither the corporate structure or the reorganization leaving the judgment
debtor corporation without assets was fraudulent. It did so because the
reorganization created an injustice. Justice Nordheimer held that
Downtown Eatery was arguably more relevant than Transamerica because it
post-dated Transamerica and was involved in enforcement of a judgment debt as
opposed to finding of liability.
Finally, the majority’s finding that Chevron Canada was not
an asset of Chevron Corporation was one that Justice Nordheimer found was “completely
detached from real-world realities”. He found that it was crystal
clear that Chevron Canada was an asset of Chevron Corporation as that term is
understood in common business parlance. All of Chevron Canada’s shares
are owned by Chevron Corporation (albeit indirectly) and it is ultimately
controlled for all practical purposes by Chevron Corporation. He held
that the question was not whether the court was prepared to sacrifice certainty
for the sake of expediency, it was whether the court was prepared to recognize
that there may be situations where equity would demand a departure from the strict
application of corporate separateness principle in the context of
enforceability of a valid judgment whether foreign or domestic. However,
he found that the United States court’s finding that the Ecuadorian judgment
was obtained by fraud put the apparently valid foreign judgment in question. Canadian courts have not yet been called upon
to make their own determination of the validity of the judgment. Absent
such a finding, even on Justice Nordheimer’s approach, the judgment could not
be enforced.
Regards,
Blair
