Chevron’s options to evade $18 billion judgment narrowing

January 23, 2012

On Thursday, the U.S. Court of Appeals for the Second Circuit denied Chevron’s bid to re-impose a worldwide injunction barring Ecuadorean plaintiffs from acting to enforce the $18 billion environmental contamination judgment that an Ecuadorean appellate panel upheld earlier this month. That’s Chevron’s second big rebuff in its U.S. campaign to knock out the Ecuadorean judgment, which the oil company contends was fraudulently obtained. Two weeks ago U.S. District Judge Lewis Kaplan in Manhattan — theretofore a reliable backstop for Chevron — refused the oil company’s motion for an attachment order in its racketeering suit against the Ecuadorean plaintiffs and some of their lawyers and experts.

Chevron counsel Randy Mastro of Gibson, Dunn & Crutcher painted Kaplan’s ruling as a temporary setback, since Kaplan said the oil company could try again for a pre-trial attachment. But it’s impossible to spin the Second Circuit’s order Thursday as anything but bad news for Chevron. The appellate judges, you’ll recall, lifted Kaplan’s injunction on enforcement of the Ecuadorean judgment last September. They also stayed Chevron’s declaratory judgment case before Kaplan, in which the oil company sought to prove its fraud allegations against the Ecuadoreans and their lawyers. At the time of those rulings by the Second Circuit, the $18 billion judgment was still under consideration by the Ecuadorean appeals court, and the Ecuadoreans asserted that there was no need for an injunction because the judgment couldn’t be enforced while the Ecuadorean appellate process was underway. When Chevron went back to the Second Circuit this month, Gibson Dunn argued that since the Ecuadoreans are poised to enforce their judgment, the oil company now needs the injunction.

The Second Circuit’s denial of Chevron’s motion suggests that the U.S. appellate panel (which still hasn’t issued an opinion explaining its September orders) had bigger problems with Kaplan’s injunction than mere timeliness. Although there’s a chance the appeals judges based Thursday’s decision on ripeness, which was one of the issues both sides briefed, it seems likelier — both from the denial of Chevron’s motion and last September’s oral argument — that the U.S. judges are concerned about undercutting the authority of another country’s judiciary. If that’s the case, the Second Circuit simply isn’t going to permit Chevron to use the U.S. courts to block enforcement of the Ecuadoreans’ judgment around the world. Chevron’s racketeering case is still alive and kicking before Kaplan, but without an injunction or pre-trial attachment order, the RICO suit can only provide an after-the-fact remedy. (In an email statement, a Chevron spokesman said the company is “disappointed that the Second Circuit did not grant our motion to lift the stay, and we await the court’s opinion.”)

If Chevron can’t use the U.S. courts to bar the Ecuadoreans from collecting, it has three ways to attempt to evade the $18 billion judgment: the Ecuadorean courts; enforcement disputes elsewhere in the world; and the bilateral treaty arbitration between the Republic of Ecuador and Chevron over the scope of the release the Republic granted Chevron predecessor Texaco more than 20 years ago.

Ecuador is fraught with danger for Chevron. On Friday , the oil company filed a notice that it is appealing the $18 billion judgment to Ecuador’s highest court. Under Ecuador’s procedures, the intermediate appeals court that just affirmed the judgment can set a bond that Chevron must pay if it wants to stay enforcement during the high court appeal. But according to the plaintiffs, if Chevron loses the appeal, it loses whatever it posts as a bond in addition to the judgment. Even if that’s not the case, Chevron has taken great pains to move all attachable assets out of Ecuador. Posting bond there puts money within easy reach of the Ecuadorean plaintiffs.

Chevron also faces a deadline on a decision that affects almost half of the $18 billion judgment, which was imposed as a penalty for Chevron’s ongoing refusal to apologize for allegedly contaminating the Lago Agrio region of the rainforest. The penalty was first imposed by the trial court, after Chevron failed to meet its deadline for apologizing. The Ecuadorean appeals panel has given Chevron a new deadline to apologize and thereby eliminate about $8 billion of the $18 billion judgment. In a clarification the plaintiffs requested, the appeals panel said any apology would not be regarded as an admission of liability elsewhere in the world. But I seriously doubt Chevron will rely on the credibility of the Ecuadorean court system — which it has been calling corrupt for the last three years — as it opposes enforcement of the judgment in courts around the world. There’s almost no chance Chevron will apologize and risk the possibility that other courts will interpret the apology as an admission of liability.

Chevron made an interesting strategic decision before the intermediate Ecuadorean appellate panel that the plaintiffs believe gives them an edge in the international enforcement litigation that’s sure to follow any high court endorsement of the $18 billion judgment. There was some ambiguity in the Ecuadorean appellate ruling on the court’s consideration of Chevron’s fraud allegations. The plaintiffs requested clarification; Chevron did not, but was permitted to respond to the plaintiffs’ request. In the clarification issued last week, the Ecuadorian appeals panel said it had reviewed Chevron’s fraud allegations but hadn’t based its decision on them. The appellate judges said Chevron’s fraud case could be adjudicated in the United States.

The plaintiffs believe that the Ecuadorean court’s clarification — confirming that it reviewed Chevron’s fraud allegations and upheld the judgment despite them — will carry weight with other courts as they consider attachment motions by the Lago Agrio plaintiffs. Chevron, on the other hand, apparently intends to argue to judges around the world that there’s been no final determination on its fraud allegations. The oil company will also assert that the clarification is further evidence to support its claim that the Ecuadorean courts are in the pocket of the Lago Agrio plaintiffs. (“Any attempt to enforce this fraudulent Ecuadorian judgment will be met with a mountain of fraud evidence these plaintiffs and their counsel cannot surmount or even contest because it comes largely from their own admissions,” said Chevron counsel Mastro.)

Chevron’s perceived ace card, meanwhile, is the bilateral treaty arbitration. Last year, in a preliminary decision that didn’t get nearly as much attention as Kaplan’s worldwide injunction, the arbitration panel ruled that the Republic of Ecuador must act to bar enforcement of the Lago Agrio plaintiffs’ judgment. On Jan. 4, Chevron lawyers at King & Spalding sent an emergency letter to the arbitration panel, requesting that the panel demand a showing that the Republic is complying with its 2011 order. The Republic of Ecuador’s lawyers at Winston & Strawn responded on Jan. 9 with a 15-page letter explaining that the panel’s order would require an impermissible violation of Ecuador’s separation of powers between the executive and judicial branches. The panel has scheduled private hearings to take place in Washington, D.C., in February.

But for the first time in years, the Lago Agrio plaintiffs are beginning to talk with some swagger about prevailing against an embattled Chevron. They’re asserting their own fraud claims against Chevron before the Second Circuit and the BIT arbitration panel, and their lawyers at Patton Boggs and Smyser Kaplan & Veselka can point to a $18 million fee legal award the Ecuadorean appeals court imposed on Chevron for vexatious litigation tactics.

This case has already achieved epic status, but there’s still a long way to go. And the ultimate result seems harder than ever to predict.

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