Friday, June 8, 2018

Ecuadorian Villagers Barred From Enforcing Massive Environmental Judgment Against Chevron Canada

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.   


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.   



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