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.   

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

Bernie Madoff's Frauds Continue To Reverberate Years Later

Seven years after Bernie Madoff was sentenced to 150 years in prison for frauds worth an estimated US$65 billion, the legal shockwaves from his disgraced empire continues to reverberate.  In a case that was recently decided by the Grand Court of the Cayman Islands, the court determined how the remaining value of a Cayman “feeder fund”, once part of the Madoff empire and now in official liquidation, should be distributed among its investors.

 

In this case, Herald and Primeo were open-ended investment funds.  They both placed funds for investment with a Madoff-related entity called BLMIS. 

 

In 2007, Primeo assigned the credit of its account with BLMIS to Herald in return for subscribing for shares in Herald.  The number of Herald shares provided to Primeo was based on the perceived value of Primeo’s account with BLMIS, which at that time was valued at US$466 million. 

 

In 2008, it was discovered that BLMIS was a Madoff run Ponzi scheme, with the consequence that every reported Net Asset Value (“NAV”) had been misstated, including the NAV used to calculate the value of Primeo’s consideration under its subscription with Herald. 

 

Herald was subsequently put into liquidation and its liquidator sought to determine how the remaining value in the fund should be distributed among its shareholders, including Primeo.  In particular, the liquidator was tasked with determining whether Primeo’s shareholding in Herald should be adjusted to reflect the fact that it had received a greater number of shares in Herald than it would have otherwise received if the actual value of its account with BLMIS had been known at the time of the subscription.  

The issues before the Cayman Court were:  (a) whether Herald’s share register should be rectified; and, (b) if so, on what basis should any rectification be performed.  

Under the applicable Cayman Islands Companies Law, the concept of rectification implied restoring the shareholder’s register to a position that accurately reflected the relative position of all shareholders as it would be if all subscriptions and redemptions had been transferred at a “true” NAV per share.  The court found that since every subscription and redemption of shares in Herald after the initial offering had occurred on the basis of a fraudulently misstated NAV, there could be no clearer case in which the power of the liquidator to rectify should be exercised.  The court held that any rectification needed to apply equally to all remaining shareholders.

 

There were several methods as to what basis rectification should be performed.  The liquidator submitted that the register should be rectified so that the net loss of subscription monies in Herald was borne rateably and that the remaining shareholders shared equitably in the pool of funds available for distribution. 

Two methods were proposed to achieve this:  (a) the net investment method – this method calculates each shareholder's economic interest on the basis of the amount of their total subscriptions, less any redemptions, as a percentage of the total surplus fund available for distribution; and  (b) the rising tide method – this method directly takes account of redemptions that have already been paid to investors in addition to the remaining value in the company.  It works by distributing remaining funds to shareholders according to the value each shareholder has already realized.

 

The Cayman Court found that both methods would create a result whereby Herald's shareholders would "share in the common misfortune of Madoff's fraud".  However, he concluded that the Companies Law prevented either method from being available.

Instead, the court held that the proper approach was to assign a constant “true” NAV for each and every subscription and redemption throughout Herald’s active life.  Since Herald’s NAV had been fraudulently misstated since its inception, the true NAV was held to be the initial offering price of the shares.  All NAVs after this date needed to be disregarded despite the value that may have actually been assigned (and paid) for shares at the time. 

 

The court directed the liquidator to recalculate each subscription and redemption of shares in Herald  at this constant “true” NAV and rectify the share register accordingly. 

Regards,

Blair

Court of Appeal Rejects Lawyer's Application to Set Aside Fraudulent Misrepresentation Finding

In a recent decision - Meridian Credit Union Limited v. Ahmed Baig, 2016 ONCA 150  - the Ontario Court of Appeal affirmed a motion judge’s decision to grant summary judgment against the party who had made the motion despite the fact that the responding party had not made a cross-motion for judgment.  The court also upheld a finding by the motion judge that the defendant  was personally liable for fraudulent misrepresentation; failed to disturb the motion judge’s finding that the defendant could be held vicariously liable for his lawyer’s fraudulent misrepresentation; and refused leave of the lawyer, and his law firm, to introduce fresh evidence on appeal .  The court dismissed the lawyers' argument that they had a right to be heard and refused to set aside the findings of fraudulent misrepresentation the motion judge had made against them.

 

In this case, Meridian Credit Union Limited (“Meridian”) was a creditor in a court-appointed receivership.  The defendant, Ahmed Baig (“Baig”), agreed to purchase a building located on Bay Street in Toronto from the receiver for $6.2 million.  Unknown to the receiver and prior to closing, Baig agreed to resell the property to Yellowstone Property Consultants Corp. (“Yellowstone”) for $9 million.   The receiver claimed that had it known of this resale transaction, it would not have recommended that the court approve the sale to Baig.

 

Meridian subsequently discovered the resale transaction.  It had not recovered the full amount owing to it in the receivership.  The receiver assigned its cause of action against Baig to Meridian and Meridian then commenced an action against Baig for breach of contract and fraudulent misrepresentation.

 

The receiver had agreed to sell the property to Baig in trust for a corporation to be incorporated.  Before that transaction closed, Baig agreed to resell the property to Yellowstone.  Baig did not tell the receiver about the second agreement with Yellowstone.

 

Baig then retained the law firm of Miller Thomson to assist him with the transaction.  Peter Kiborn, who practiced law at Miller Thomson, acted for Baig in structuring the transaction.  Both Baig and Kiborn wanted to prevent the receiver from discovering the sale to Yellowstone because they believed that the $2.8 million difference in price would jeopardize court approval.  As a result, Kiborn informed the receiver that title was to be directed to Yellowstone on closing.   The receiver assumed that Yellowstone was Baig’s corporation incorporated for the purpose of the agreement.  Neither Baig or Kiborn,  or anyone else at Miller Thomson,  ever corrected that misunderstanding. 

 

At the summary judgment motion before Justice Frederick Myers of the Superior Court of Justice, Baig brought a motion for summary judgment dismissing Meridian’s claim.  Justice Myers dismissed that motion.  Instead he found Baig liable for fraudulent misrepresentation.  The Court of Appeal found that Justice Myers did not err by granting summary judgment against Baig.  Baig’s lawyers had submitted that all of the relevant evidence was before the court and had explicitly invited Justice Myers to render a decision in favour of either party.  Two recent decisions from the Court of Appeal make it clear that it is permissible for a motion judge to grant judgment in favour of the responding party even in the absence of a cross-motion for such relief. 

 

Justice Myers found Baig liable for two reasons.  He concluded Baig was liable for misrepresentations made by Miller Thomson – the documents delivered as part of the closing contained untrue statements.  Kiborn knew that these statements were false and he intended for the receiver to rely on them.  On the motion, Justice Myers noted a concession made by Baig’s lawyer, that Baig could be held liable for tortious misrepresentations made by his lawyers Miller Thomson.

 

Second, Justice Myers found Baig liable for his own personal conduct.  He held that Baig’s failure to correct the misimpression that Yellowstone was a corporation created by Baig amounted to a fraudulent misrepresentation.

 

Baig subsequently commenced an action against both Kiborn and Miller Thomson, claiming among other things, contribution and indemnity.  Miller Thomson and Kiborn obtained leave to intervene on the appeal.  In addition, they sought leave to introduce fresh evidence on the appeal.  The interveners sought to set aside the finding of Justice Myers that they had made fraudulent misrepresentations on the grounds that the motion judge breached the rules of natural justice and procedural fairness by making findings about them in their absence. 

 

The appeal was heard before Justices LaForme, Strathy and Huscroft.  The court’s decision was written by Justice LaForme.

 

The Court of Appeal dismissed Baig’s appeal and denied the interveners’ application for the following reasons.  The Court of Appeal reviewed the recent Supreme Court of Canada decision in Hyrniak v. Mauldin concerning proving civil fraud and noted that the record disclosed that Baig had engaged in actions that amounted to misrepresentation.  Both he and his counsel had actively concealed the agreement to sell to Yellowstone and had fraudulently misrepresented that Yellowstone was the corporation incorporated to close the sale with the receiver.  In certain circumstances, silence and half-truths can amount to a misrepresentation. 

 

At the appeal, Baig’s counsel attempted to withdraw his concession at the motion that Baig would be liable for any tortious misrepresentation made by his lawyers.  Justice LaForme found that it was inappropriate for Baig to withdraw such concession and argue for the first time on appeal that there was no basis for him to be held liable because he was protected by the corporate veil.  In any case, Justice LaForme found that Baig had made the fraudulent misrepresentations in his personal capacity.  Because that finding was upheld, Justice LaForme found it was not necessary to address whether Baig would be liable for his lawyers’ actions.

 

With respect to the interveners’ arguments, Justice LaForme denied their application to introduce fresh evidence on the appeal.  He held that the fresh evidence about why they did not intervene in the summary judgment motion was irrelevant to the issues raised and could not have affected the results of the motion. 

 

Justice LaForme also rejected the interveners’ argument that they had a right to be heard because Justice Myers had made adverse findings against them.  To the contrary, he held that they did not have a right to be heard or to receive notice.  As non-parties to the action, Miller Thomson and Kiborn were not directly impacted by the summary judgment order.  They were not bound by Justice Myers’ finding that they made fraudulent misrepresentations.  They were free to defend their reputations and argue in the action made against them by Baig that they never made fraudulent misrepresentations. 

 

Their main complaint was that Justice Myers’ publicly available reasons could damage their reputations.  Justice LaForme found that the authorities did not support the right in a civil action to notice of a non-party witness or to adduce evidence and make submissions whenever an adverse finding may be made.  Such procedural entitlements would impose too great a burden on the courts and threaten the finality of decisions.   Justice LaForme held that non-parties are limited to whatever procedural rights they have under the rules. 

 

Justice LaForme held that Miller Thomson and Kiborn were fully aware of the action and its potential impact on the claim against them.  In spite of this, they chose not to intervene, adopting a wait and see approach.  Now that a finding had been made with which they took issue, they believed that the finding should be set aside.  He held that non-parties should not be able to lurk in the shadows and then spring up to challenge a decision whenever the outcome or findings of fact may affect them in some manner they do not like.  

Regards,

Blair  

Avon Settles Bribery Related Class Action

 

Avon Products Inc. (“Avon”) recently settled a class action lawsuit brought against the beauty products company and two former executives concerning Avon’s compliance with the US Foreign Corrupt Practices Act (“FCPA”).  Avon settled the lawsuit despite the fact that the US District Court for the Southern District of New York (“Court”) had granted a motion to dismiss the lawsuit.  In the action, certain of the company's shareholders had alleged that Avon and its former executives had issued materially false and misleading statements concerning Avon’s compliance with the FCPA by concealing that the company had given bribes to Chinese government officials by various means, including providing lavish gifts and paying travel expenses improperly.

 

In 2008, Avon publicly announced that it had received allegations of potential FCPA violations in connection with its business in China and that it had disclosed such information to the US Department of Justice (“DOJ”) and the US Securities and Exchange Commission (“SEC”).  That initial press release was the first in a series of public statements by Avon relating to the potential FCPA violations and after each announcement, Avon’s stock price fell.  The class action claimed that Avon had artificially inflated its stock price by intentionally misleading shareholders about the company’s compliance with the FCPA.  The shareholders alleged that the defendants knew that Chinese officials were being bribed years before the company publicly disclosed it in 2008.  The action also alleged that Avon embraced a corporate culture that was “actively hostile” to effective oversight and hid its dependence on corrupt activities to boost their sales revenue. 

 

In December of 2014, the DOJ and SEC levied fines of $135 million to Avon for violating the FCPA - $68 million was paid to settle the DOJ’s criminal investigation and $67 million was paid to settle the SEC’s civil investigation.  As part of the settlement, Avon was also required to retain an independent monitor to review its FCPA compliance program for a period of 18 months, followed by an additional 18 months of self-reporting on its ongoing compliance efforts

 

Shareholder litigation is a common occurrence following or during FCPA investigations of public companies – both securities class actions and shareholder derivative actions.  In a derivative action shareholders file suit against members of the board of directors or corporate officers on behalf of the corporation itself for a wrong the corporation has suffered. 

The Court dismissed the action on the grounds that the plaintiffs had failed to demonstrate that Avon made any false statements regarding the use of bribes.  The Court held that in order to survive the motion to dismiss, the shareholders were subject to “heightened pleading requirements” but had failed to plead facts that were sufficient to demonstrate that Avon’s officers had met the intent to deceive Avon’s shareholders or the intent to report misleading statements regarding Avon’s business successes in China before or after 2008 when the company reported that it had become aware of the allegations. 

 

Under the heightened pleading requirements for securities fraud complaints, shareholders must plead sufficient facts with enough particularity to constitute fraud and plead with particularity facts that demonstrate a strong inference that Avon and its officers and directors intended to deceive their shareholders or were severely reckless. 

 

The Court found that Avon’s statements in its ethics policies regarding its high standards for ethics did not constitute fraud.  It found that these general statements of the company’s commitments to high standards of business ethics were not materially misleading to shareholders finding that the statements were mere “puffery” or generalizations regarding Avon’s integrity upon which reasonable investors would not rely.

  

The Court held that bare assertions about executives of Avon having information adverse to the disclosed filings were not sufficient to demonstrate that they were actually aware of alleged bribes paid to Chinese officials.  The shareholders merely alleged that executives “should have been aware” of the bribes.  The Court held that such facts were too conclusory and lacked sufficient detail to demonstrate intent to mislead. 

 

After 2008, the mere fact that Avon received a whistle-blower report regarding potential violations did not demonstrate that the company and its directors knew the allegations to be true.  They were permitted to conduct an internal investigation before announcing that the company received a report of a potential FCPA violations.

 

The Court also held that the plaintiffs failed to allege particularized facts showing that the company misled investors with regard to its internal investigation or compliance procedures.

 

When Avon first learned about potential FCPA problems in China through an internal audit report, it consulted an outside law firm but did not carry out a thorough investigation.  Instead, it simply directed that internal control measures be instituted at its subsidiary.  However, no such measures were taken and there was no follow up on the compliance initiatives.  The full-blown internal investigation only took place a few years later after a new CEO received a whistle-blower letter.  By this time, much of the damage had been done. 

Settlement of the class action came at a time when Avon had moved to dismiss an amended complaint filed by the shareholders' lawyers

Regards,

Blair   

SCC Clarifies Test For Civil Fraud

Albert Bruno was the principal of an American company called Bruno Appliance and Furniture, Inc.  In late 2001, Bruno met with Robert Cranston, the principal of a Panamanian company, Frontline Investments Inc.  As a result of those meetings, Bruno signed a number of investment documents in favour of Frontline.

 

In February of 2002, Bruno met with Cranston and Gregory Pebbles, a lawyer at the Toronto offices of Cassels Brock and Blackwell.  Robert Hryniak did not attend this meeting.  However, Hryniak's company, Tropos Financial Corp., received and paid a bill for Pebbles'  attendance. 

 

In early March of 2002, Bruno Appliance wired US$1 million to Cassels Brock who assigned the funds to an account associated with its client, Hyrniak's company, Tropos.  Bruno Appliance's funds were then "bundled" with other funds totalling US$3.5 million and paid to Tropos in a bank draft.  At the end of April 2002, Tropos paid US$2.5 million to a company called Southern Equity Investors Inc. and in June 2002, Tropos transferred approximately US$550,000 to an individual named Reinhard.  By the end of September 2003, the balance in Cassels Brock's  Tropos account had dwindled to US$19,000. 

 

Bruno Appliance's money was not invested and it never received a return on its investment. 

 

Bruno Appliance joined with other plaintiffs in a civil fraud action against Hryniak, Peebles and Cassels Brock.  The plaintiffs brought motions for summary judgment.  The motion judge found that Bruno Appliance had established its claim against Hryniak.  He found that despite his absence from the early meeting, Hryniak knew that the meeting was occurring and that his company Tropos paid for Pebbles' attendance.  The motion judge found that Hryniak was aware that US$1 million was placed in the Tropos account and that he gave instructions regarding those funds. 

 

On appeal to the Ontario Court of Appeal, the court allowed Hyrniak's appeal and held that there were two genuine issues that required a trial:  whether Hryniak induced Bruno Appliance to invest; and whether some of the funds were misappropriated by Cranston rather than Hryniak.

 

The Court of Appeal also found that the motion judge failed to address the issue of whether Hryniak knowingly made any misrepresentation that induced Bruno Appliance to invest, a necessary element of fraud. 

 

The Court of Appeal ordered that the Bruno Appliance action proceed to trial.  The plaintiff further appealed to the Supreme Court of Canada.

 

The Supreme Court of Canada dismissed the plaintiff's appeal and ordered that the action proceed to trial.  

 

At the Supreme Court the parties disagreed as to the elements of the tort of civil fraud, in particular whether proof was required that Hryniak induced Bruno Appliance to invest its money.  The judgment of the court was delivered by Justice Karakatsanis.  

 

The Supreme Court held that a classic statement of the elements of civil fraud stems from an 1889 decision of the British House of Lords, Derry v. Peek: 

 

First in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice.  Secondly, fraud is approved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false... Thirdly, if fraud be proved, the motive of the guilty person of it is material.  It matters not that there was no intention to cheat or injure the person to whom the statement was made.

Since that statement was made, the Supreme Court of Canada has added two additional requirements - the false statement must actually induce the plaintiff to act upon it and proof of loss is required.

 

Accordingly, Justice Karakatsanis summarized the following four elements of the tort of civil fraud:  (1)  a false representation made by the defendant; (2)  some level of knowledge of the falsehood of the representation on the part of the defendant (whether through actual knowledge or recklessness); (3)  the false representation caused the plaintiff to act; and (4)  the plaintiff's actions resulted in a loss.

 

In dismissing the appeal, the SCC found that there was a genuine issue requiring a trial.  Civil fraud required a finding that Hryniak made a misrepresentation which induced Bruno Appliance to invest.  The motion judge did not identify the need for a misrepresentation and did not find that Hryniak had made one.  Since Hryniak was not present at the important meeting, he could only be liable for any misrepresentations made by Peebles or Cranston if their statements could be attributed to him.  However, the Court of Appeal considered and rejected the possibility that Pebbles or Cranston was acting as Hryniak's agent. 

 

While the motion judge found that the evidence clearly demonstrated that Hryniak was aware of the fraud and may have in fact benefited from the fraud, whether Hryniak perpetrated the fraud by inducing Bruno Appliance to contribute the US$1 million to a non-existent scheme was a genuine issue that required a trial. 

 

Regards,

 

Blair

Chevron Blames Lawyer's "Racketeering Enterprise" for Massive Ecuardorean Judgment Against It

Last month (September 26), I blogged about a recent decision of Justice D.M. Brown of the Ontario Superior Court of Justice, who granted Chevron Corp.'s  stay of an action  commenced by Ecuadorean plaintiffs to enforce what was at that time a $17.2 billion judgment rendered against Chevron's predecessor, Texaco, for allegedly polluting Ecuador's Amazon Basin.  In his reasons for dismissing the motion, Justice Brown mused about why the plaintiffs had chosen to attempt to enforce the judgment in Ontario, where Chevron had no assets, "As I stated during the hearing, the jurisdiction in which the judgment debtor owns assets is only a short distance from this courthouse - in less than an hour's drive one can cross a bridge which takes you into the very state in which Chevron initiated its anti-enforcement injunction proceedings".  

Well, it looks like Chevron, at least, was listening to the judge's admonition.  In a trial commencing this week in Manhattan, Chevron is asking a federal court in New York to prevent the plaintiffs and their lawyer from using the US courts to enforce the Ecuadorean judgment.  The trial is being heard before US District Judge Lewis Kaplan, the very judge that first tossed out the plaintiffs' action saying that "the case had nothing to do with the United States".   The twist in this trial is that Chevron, the huge multi-national company, is accusing the plaintiffs and their lawyer, Steven Donziger, of fraud.  In a bit of hyperbole, worthy of any trial attorney, a lawyer for Chevron said the proceedings in Ecuador were "one of the most egregious litigation frauds in history".  Chevron is accusing Donziger and his associates of running a racketeering enterprise by bribing the judge who wrote the Ecuadorean judgment and of even writing part of the judgment themselves.  Observers have said that this case "exemplifies a new pattern of corporations seeking to crush personally plaintiffs' lawyers who bring sizable liability claims".  

In their defence, Donziger and the plaintiffs are accusing Justice Kaplan of bias.  Kaplan recently issued a 104 page pre-trial ruling warning that he has already determined "there was probable cause to suspect a crime or fraud" by Donziger in connection with the fabrication of scientific evidence, through the coercion of one Ecuadorean judge, the bribing of other Ecuadorean judges, and the ghost writing of a critical report supposedly composed by independent court-appointed official.  Kaplan also added that he suspected that Donziger's legal team in Ecuador secretly wrote some or all of the February 2011 court judgment.     

Chevron and its lawyers are seeking a ruling barring Donziger and the other plaintiffs' lawyers from trying to enforce the judgment in courts around the world wherever Chevron may have assets.  One of the reasons that Justice Brown stayed the action in Ontario was that it was shown by the evidence that Chevron had no assets in Ontario.  Justice Brown held, "Ontario courts should be reluctant to dedicate their resources to disputes where, in dollar and cents terms, there is nothing to fight over.  In my view, the parties should take their fight elsewhere to some jurisdiction where any ultimate recognition of the Ecuadorian judgment will have a practical effect."  

There is an incentive for Donziger to do so.  He and the other plaintiffs' lawyers could collect as much as $1.2 billion in fees as their portion of the judgment.

(with reports from Bloomberg.com and the National Post)

Regards,

Blair