Why Chevron's win in Canada might be big

May 3, 2013: 10:21 AM ET

A potentially lasting victory in the energy giant's $19 billion case.

By Roger Parloff, senior editor

<> on July 27, 2012 in San Francisco, California.

FORTUNE -- On May 1, a Canadian judge handed Chevron a potentially major victory in an enforcement action brought against it by the Amazon Defense Front, which is the group leading the environmental litigation against the oil giant in Lago Agrio, Ecuador, where Texaco drilled for oil from 1964 to 1990.

The Front, which represents 47 residents of the former Texaco concession area, is trying to seize Chevron's Canadian assets to satisfy a $19 billion judgment it won against the company in the provincial court of Sucumbíos, Ecuador, in 2011. (Chevron (CVX), which acquired Texaco in 2001, has virtually no assets in Ecuador.)

On Wednesday Justice David M. Brown of the Superior Court of Justice in Toronto, Ontario, rejected the Front's suit. If upheld, the ruling could become a very important precedent for the courts of Western nations with comparable judicial systems, especially Australia, the U.K., and New Zealand. The Front's lawyers had previously said they sought out the Canadian forum first because, among other things, its law afforded relatively limited grounds for refusing to enforce a judgment.

Lawyers for the Front have vowed to appeal. For all I know they may well prevail, too, since Judge Brown's 42-page ruling turns on exceedingly arcane and novel issues of Canadian law concerning both jurisdiction and corporate structure. (For a legal analysis of the ruling by a U.S. attorney who specializes in transnational litigation, see this post by Ted Folkman in his blog, Letters Blogatory.)

In fact, at first glance, Judge Brown's ruling might even seem callously legalistic. He rejected the suit because Chevron—the U.S.-based parent corporation against which the Front won its judgment—technically owns no assets in Canada. It indirectly owns Chevron Canada, a seventh-tier subsidiary, but such ownership is too indirect, Judge Brown held, given that Chevron Canada itself never did business in Ecuador.

Nevertheless, beneath the legal jargon, Brown's reasoning appears to rest on a simpler, more common sensical premise that could bode ill for the Front. The judge was reluctant to expend Canadian judicial resources wading into a bitter, bottomless, two-decade-old legal quagmire when the Front could have so easily filed its suit in the United States, "only a short distance from this courthouse," where Chevron is headquartered and unquestionably owns assets.

MORE: Have you got a piece of this lawsuit?

Not only had the Front not tried to do that, the judge noted, but it had gone to great lengths to prevent a U.S. judge who was deeply familiar with the case—U.S. District Judge Lewis Kaplan of Manhattan—from ruling on many of the questions it now wants Canadian courts to start burrowing into anew.

Here's the background Judge Brown was alluding to. In 1992, class action lawyers brought a suit in Manhattan against Texaco on behalf of the Ecuadorian residents of the Texaco concession area. At Texaco's behest, the suit was dismissed on multiple grounds, including forum non conveniens—meaning that the case could better be heard in Ecuador. The appeals court affirmed the forum non conveniens dismissal, with Texaco agreeing to be bound by an Ecuadorian judgment so long as it met the minimum standards required under New York law for enforcement of any foreign judgment. The New York case was then dismissed and a new case, led by the Front, was filed in Lago Agrio in 2003.

In February 2011, the Lago Agrio court handed down a $18.2 billion judgment (later bumped up to $19 billion). Chevron immediately sought a declaratory ruling in Manhattan on whether the Ecuadorian ruling was enforceable under New York law. A month later Judge Kaplan found that it very likely wasn't, since Chevron had presented "ample evidence" that the judgment had been procured by fraud and obtained in a court that had not provided rudimentary due process—the minimum enforcement standards required under New York law. He therefore enjoined enforcement of the judgment pending a full trial.

In January 2012, however, the Front's lawyers succeeded in vacating Judge Kaplan's ruling—not because Kaplan made any erroneous factual findings but, rather, on jurisdictional grounds. The appeals panel decided that because the Front hadn't sought to enforce the judgment in Manhattan, Judge Kaplan couldn't issue a preemptive ruling on its non-enforceability at Chevron's behest. A U.S. judge could only give such an opinion if and when the Front's lawyers tried to enforce it in the U.S.—which they hadn't. (And still haven't.)

This unusual back story obviously rankled Justice Brown. "In less than an hour's drive," he wrote, "one can cross a bridge which takes you into the very state in which Chevron initiated its anti-enforcement injunction proceedings. Yet, the plaintiffs have not sought the recognition and enforcement of the foreign judgment in the place of their judgment debtor's [Chevron's] residence or place of business and, instead, have come to Ontario arguing that the assets nominally held by a stranger to the foreign judgment [Chevron Canada] should be made available to satisfy it."

Of course, the reason the Front followed such a circuitous path was to try to circumvent the elephant in the room. In the two years that have passed since Judge Kaplan's March 2011 ruling, the evidence that the Front committed fraud to procure its Ecuadorian victory has only grown more multifaceted and seemingly irrefutable. Judge Kaplan found in July 2012, in fact, that the Ecuadorian judgment was "unquestionably...tainted" by an elaborate, multiyear fraud, in which an ostensibly neutral and independent court-appointed expert, Richard Cabrera, acted, in reality, as the Front's hand-chosen puppet, allowing the Front's lawyers to map out his work plans and ghost-write his reports. Worse still, Chevron has now produced copious, compelling evidence suggesting that the entire 188-page $19 billion court judgment itself was ghostwritten by the Front's Ecuadorian lawyers, who were allegedly given that opportunity by two Ecuadorian judges in exchange for promising them $500,000 from any eventual recovery. (One of the judges in question, who has fled Ecuador, affirms Chevron's account, while the other, who still lives in Ecuador, denies it.)

MORE: Ex-judge says he was bribed by Ecuadorians' suing Chevron

The Front's spokespeople have argued that the Front avoided the Manhattan forum because Judge Kaplan is biased. The Front's lawyers have repeatedly tried to have Judge Kaplan removed on those grounds, but the appeals court has rejected their arguments.

(While it is true that Judge Kaplan has, at times, evinced skepticism toward some of the assertions of the Front's lawyers, it is also true that, having been initiated into the case through an ancillary proceeding filed in April 2010, Judge Kaplan has lived through the Front's apparent frauds in real-time. He has repeatedly seen its assertions exposed as falsehoods, and has watched as its stories have clumsily mutated in an apparent attempt to retroactively accommodate the facts as they emerge. In the past the Front's lawyers denied caustically and repeatedly that they ghost-wrote Cabrera's report, but their lead U.S. lawyer, Steve Donziger, has now effectively admitted under oath that they did, as have the report's technical writers, who were the Front's hired consultants from Boulder, Colorado. The Front's lawyers silently stood by as co-counsel argued that outtakes from a documentarist's film about the case would reveal nothing pertinent when, it turned out, those outtakes depicted the Front's legal and scientific team privately huddling with Cabrera in the Front's offices and planning out his report before Cabrera had even been formally appointed. The Front currently denies having ghostwritten the judgment, but its lawyers cannot account for the fact that nearly one third of it contains passages and data lifted verbatim from the Front's internal memoranda and databases, which were never formally introduced into the court record. One current Front theory is that Chevron set the Ecuadorian judge up by somehow slipping the Front's internal documents to the judge in hopes that he'd plagiarize them in his ruling so that Chevron would later have a basis for challenging the judgment if it went against them. To be skeptical under these circumstances is not bias; it is just good sense.)

At this stage, the Front's main hope is to continue to attack Chevron in the press, where its cause remains célèbre, notwithstanding the apparent disintegration of the legal case. (Last month, the Front's scientific experts for the past six years recanted all their findings.) The remaining pillar of its strategy rests on creating enough disruption with enforcement suits around the globe to force Chevron to throw in the towel and settle. In addition to the Canadian action, the Front has brought suits in Brazil and Argentina, with additional filings likely.

But yesterday's ruling by Judge Brown, if upheld, is a bad omen for the Front's chances, at least in the stronger courts of the world—those with respect for the rule of law.

As for potentially more politicized courts in less developed nations, Chevron must take it chances. But, of course, oil companies are used to operating in politically unstable regions, where even greater risks—like outright nationalization—can never be wholly discounted. The other side of the coin is that seizing a company's property can carry unappealing repercussions for the seizing nation, to the extent it seeks foreign investment and technical assistance. Not every developing nation will undergo those risks for the sake of ensuring that the Amazon Defense Front, its lawyers, and its investors get paid.

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