Legal Blog

Veil

In our newsletter of June 2014, we discussed the attempt of a creditor of a corporate debtor to “pierce the corporate veil” so that the creditor could obtain judgment against not only the corporation, but its shareholders. We rarely, if ever, see the converse: a creditor of a shareholder debtor attempting to pierce the corporate veil of a corporation to make the corporation liable for the shareholder’s debt. This unusual situation occurred in Yaiguaje v. Chevron Corporation, a 2018 decision of the Ontario Court of Appeal.

History

And we do mean history. The plaintiffs, indigenous Ecuadorians whose lands had been polluted by an oil company, Texaco Inc., sought redress in 1993 by way of a class action in a Texas court. Texaco successfully defended on jurisdictional grounds and the plaintiffs ultimately brought their action in Ecuador. This action resulted in an 8-year trial, two appeals, and a $9.5 billion USD judgment against Chevron Corporation, the entity that had merged with Texaco in 2001.

This was wonderful news for the plaintiffs, but there was one small problem. Chevron Corp had no assets in Ecuador – because Texaco had ceased operations there in 1992. So, back they went to the USA seeking enforcement of their judgment. Chevron successfully defended that action, alleging that fraud was involved in the Ecuadorian decision. The trial court agreed with those allegations, setting out a litany of fraudulent behaviour in the Ecuadorian court proceedings, not of the plaintiffs, but their counsel. That USA trial court decision, which enjoined any attempts to enforce in the USA, was upheld on appeal.

What next? Let’s go to Canada to collect the judgment debt. But there is one major problem. Chevron Corp has no assets in Canada either. So now what? Whose name includes the word Chevron? Why, Chevron Canada Limited, a 7^th level subsidiary of Chevron Corp. To clarify  this relationship further: Chevron Corp owns all shares of sub1, who owns all shares of sub2, and so on until Chevron Canada Limited, sub7.

And so it came to pass. The plaintiffs sued Chevron Canada in Ontario.

Initially, Chevron Canada asserted that Ontario had no jurisdiction to deal with the action. That issue went all the way to the Supreme Court of Canada, who decided that there was jurisdiction, subject to the issue as to whether the plaintiffs had an actual cause of action against Chevron Canada.

Back to the Ontario court and a summary judgment motion on the issue. The motion judge dismissed the action and the plaintiffs appealed. The Ontario Court of Appeal rendered its decision in 2018, 25 years after the plaintiffs commenced the first legal proceedings.

Execution

The plaintiffs first argued that they could seize the assets of Chevron Canada by way of the Execution Act. The Court held that this was an impossibility for two reasons:

1. The Act allows for the seizure of the assets of a debtor. Chevron Canada was not a debtor and had its own corporate existence. Can you imagine a situation in which a creditor of a shareholder of TD Bank could seize the assets of the bank to satisfy its debt? As the Court put it:

“Creditors, shareholders, and employees, among others, rely on the corporate separateness doctrine that is long-established in our jurisprudence and that is a deliberate policy choice made in the CBCA. Those stakeholders have a reasonable expectation that when they do business with a Canadian corporation, they need only consider the liabilities of that corporation and not the liabilities of some related corporation.”

2. The plaintiffs did not even have a judgment against the shareholder of Chevron Canada (which was sub6); its judgment was against a shareholder 7 levels up. Notwithstanding the plaintiffs’ arguments, nothing is nefarious about a corporation having different levels of subsidiaries and a corporation is not secreting its assets merely by using subsidiaries. Further, a creditor can always seize and sell the shares held in a subsidiary and the assets of subsidiaries down the line are presumably incorporated into the value of those shares. The plaintiffs’ problem was that they could not use the execution procedures in the USA to seize and sell the shares.

Pierce

The plaintiffs then argued that the Court should pierce the corporate veil because to do so would be just and equitable. The jurisprudence has long since set out circumstances in which the corporate veil should be pierced. They are:

• A corporation is a mere facade concealing the true facts. In this case, the court must be satisfied that (a) there is complete control of the corporation such that the corporation is a puppet of the controllers; and (b) the corporation was incorporated for a fraudulent or improper purpose or used by its controllers as a shell for improper activity.
• The corporation is the authorised agent of its controllers, whether corporate or human.

The jurisprudence has rejected “just and equitable” as a ground for piercing the corporate veil and the Court was not about to change the law in that regard. It was not prepared to sacrifice certainty for expediency. Because Chevron Canada was not incorporated or used for an improper purpose, the court had no basis to disregard its separate corporate existence.

The plaintiffs also argued the group theory of liability for enforcement (i.e. when several corporations operate closely as part of the same group, they are actually a single enterprise and are responsible for each other’s debts). The Court noted that this theory has continually been rejected by the courts and for good reason; it conflates legal and economic reality. Economically and operationally, corporations may be treated as one, but, legally, they have separate corporate existences. It is very difficult to determine the exact operational boundaries of their separate existences; it is very easy to determine their legal existence.

The Court distinguished the rejected group theory proposition from a situation in which a debtor corporation had funnelled its assets to a related corporation or group of corporations. That type of group liability is still fair game. However, the facts of this case were far different; no one alleged that Chevron Corp was impecunious. It had sufficient assets to satisfy the judgment; it just refused to do so.

The Court noted that the plaintiffs wanted the Court to pierce the corporate veil(s) because, in essence, it was (they claimed) the right thing to do. The Court would have none of that. It was far too unprincipled and too ad hoc. Further, as the Court noted, the relative equities were far too uncertain. Certainly, there was environmental devastation and a judgment in favour of the plaintiffs; but a US court had found that the judgment was based on fraud. In effect, the plaintiffs wanted the Court to perform an end-run around the USA court order enjoining enforcement activity in the United States.

Upshot

The plaintiffs have still not received anything and may never receive anything.

Lawyers for Chevron Corp and Chevron Canada must have charged huge amounts to defend against the plaintiffs. Chevron Canada was awarded $200,000 in costs for the summary judgment motion and the appeal and, we expect, that was just the tip of the iceberg in costs. Conversely, we expect that the lawyers for the plaintiffs were acting on spec, or on a contingency basis, or pro bono.

 

Image courtesy of lalabell68.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.