Circuit Argument Probes Claim of Taint to Chevron Verdict

By Mark Hamblett, New York Law Journal
21 April 2015

The multi-billion-dollar fight over whether Chevron should pay for environmental damages in Ecuador or whether that country's judicial system delivered a tainted verdict returned Monday to the U.S. Court of Appeals for the Second Circuit.

Gupta Beck founding principal Deepak Gupta asked the three-judge panel to vacate a finding by Southern District Judge Lewis Kaplan that the $9 billion verdict against Chevron for environmental damage left behind by a predecessor oil company was procured by fraud and a corrupted judiciary in a scheme orchestrated by plaintiffs' lawyers, led by Steven Donziger.

Gupta told Judges Richard Wesley, Barrington Parker and Amalya Kearse that Kaplan erred in finding Chevron had the standing to bring a racketeering and fraud case against Donziger as a means of fighting the judgment, and that Kaplan was wrong to issue an injunction blocking enforcement anywhere in the United States (See Brief).

"A judgment debtor has to wait for enforcement in order to assert these defenses," Gupta said.

Later, he told the judges: "You're going to have to write an opinion on what constitutes a permissible collateral attack."

But Chevron lawyer Theodore Olson, a partner at Gibson, Dunn & Crutcher, told the court Kaplan was well within his equitable powers in granting relief to Chevron (See Brief).

Olson said the judge's rulings were based on detailed findings of fact on the corruption of the process in Ecuador, including that one judge was bribed, that a judicial opinion was ghostwritten and that a plaintiffs' expert who had his report altered wholesale as Donziger and his team sought to pin the environmental damage visited on the Amazonian rain forest by Texaco on Chevron.

"If there was ever a case warranting equitable relief with respect to a judgment procured by fraud, this is it," Kaplan wrote more than a year ago (NYLJ, March 4, 2014).

Olson told the court Monday, "What the district court did was exercise his well-established equitable powers under the laws of the United States and the state of New York."

Chevron Corp. v. Donziger, 14-826, presents the circuit with a complicated history that has several moving parts, including an international arbitration proceeding that was scheduled to begin Monday and an enforcement proceeding in Canada.

In 1993, a Texaco-led consortium ceased oil extraction efforts in the Lago Agrio region of Ecuador and reached a settlement with Ecuador and agreed to fund remedial efforts. But Donziger and other lawyers, acting on behalf of some 30,000 residents of the Amazon basin, sued in New York.

Chevron acquired Texaco in 2001 and, three years later, persuaded a federal judge to dismiss for forum non conveniens. Seven years of litigation in Ecuador resulted in a 2011 judgment that was ultimately whittled down to around $9 billion.

Meanwhile, Chevron was on the offensive, filing several declaratory judgment actions in U.S. Courts with the focal point in the Southern District, where Gibson, Dunn & Crutcher successfully moved for disclosure of outtakes from a documentary film "Crude: The Real Price of Oil."

The film, solicited by Donziger, showed the New York attorney boasting about his strategy and commenting on the malleability of the judiciary in Ecuador.

Persuaded by this and other evidence that the judiciary was corrupt and lawyers with Patton Boggs had a plan to file enforcement actions around the globe, Kaplan issued a preliminary injunction barring enforcement of the Lago Agrio judgment anywhere in the world.

But the Second Circuit reversed in 2012 in a decision by Judge Gerard Lynch, saying Kaplan had no authority "to dictate to the entire world which judgments are entitled to respect and which countries' courts are to be treated as international pariahs" (NYLJ, Jan. 27, 2012).

The case was returned to Kaplan for trial and, in the end, he issued an injunction apparently confined to the United States, although he enjoined the Ecuadorians from "undertaking any acts to monetize or profit from the judgment."

Gupta said Monday that the interests of comity should convince the court that Kaplan was wrong to disrespect the process in Ecuador.

"There's no bigger gun" than questioning the integrity of the courts in that country, something he said was sure to cause "extensive friction between legal systems."

Burt Neuborne of New York University School of Law appeared pro bono for two representative Ecuadoreans, Hugo Gerardo Camacho Naranjo and Javier Piaguaje Payaguaje.

Naranjo and Payaguaje were held by Kaplan to have ratified Donziger's actions on common law fraud and hold they are subject to the injunction barring enforcement of the judgment in U.S. Courts.

Neuborne told the circuit that it was unfair that a group of indigenous people who are being represented en masse by Donziger should be held responsible for actions they knew nothing about (See Brief).

"They were in the dark entirely," he said.

Neuborne also noted it was Chevron that moved for dismissal in New York in 2004. But once the leadership of Ecuador changed and the company got a bad result, Chevron should be estopped from challenging its judicial system.

He said Kaplan was wrong to question the legitimacy of the entire system. "If that's all Judge Kaplan's decision stands on, it stands on sand."

But Olson argued Kaplan acted correctly by "denying to individuals who perpetrated these offenses the ability to profit from their wrongdoing."

"The judgment that this judge was not enjoining any courts outside of the United States, that takes care, it seems to me, of the comity concern," he said.

Wesley said he couldn't find a case where there has been a collateral attack on a foreign state's judgment, but Olson disagreed it was a collateral attack, saying the counts of fraud covered much broader ground—including fraud in discovery in New York.

Wesley raised doubts about Kaplan's decision to strip jurisdiction from the Lago Agrio plaintiffs (turned defendants by Chevron's suit) for failing to comply with discovery.

"The breadth of this thing can be unmanageable at times," Wesley told Olson, before pressing the attorney on why Chevron was so eager to move the case to Ecuador but didn't avail itself of that country's Collusion Protection Act when it ran into evidence of fraud.

Olson's answer was that the process was "shot through with fraud" and it would be "impossible to get an impartial" hearing.

Wesley wanted to know what would happen if the arbitration panel finds that the $9 billion award was untainted by fraud. Not only did Chevron represent to a federal judge in New York in 2004 that Ecuador was the better forum, he said, but by pursuing arbitration and other avenues.

"You opened the door to inconsistent results," he said. "Why should we be a part of that?"

Parker questioned the basis for such wide-ranging relief under the racketeering statute. Olson replied that Congress contemplated relief that was as extensive as that under common law to "take away the profits from the wrongdoing."

Wesley asked, "How long will this case last?" and raised the possibility of retrying the original environmental damages action in New York.

When Gupta returned for his rebuttal time, he said, "I sympathize with the panel—this is a legal proceeding that is flawed."

"We're up to this," Parker replied. "You'll see."

Wesley then asked Gupta, "Why not a retrial?"

"The residents of Lago Agrio have been waiting 20 years," Gupta replied, prompting Wesley to add, "You could settle this case right outside the door."

After arguments, Donziger discussed the proceeding outside of the courthouse, saying "I think we're right on the facts and on the law."

"What's clear is that the panel is going to do a searching inquiry," he said. "Ultimately, the people who really matter in this case are the people of Ecuador."

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