At Least, This Time, Fraud Doesn’t Pay
Although insurance is not mentioned in the following case there is little doubt in my mind that Chevron’s defense involved some of its insurers.
In Chevron Corporation v. Donziger, — F.3d —-, United States Court of Appeal, Second Circuit, 2016 WL 4173988 (August 8, 2016) Defendants-appellants Steven Donziger, Donziger & Associates, PLLC, and the Law Offices of Steven R. Donziger (collectively the “Donziger Firm” or “Firm”), and defendants-appellants Hugo Gerardo Camacho Naranjo (“Camacho”) and Javier Piaguaje Payaguaje (“Piaguaje”), appeal from a judgment of the United States District Court for the Southern District of New York, Lewis A. Kaplan, Judge, granting certain relief against them in favor of plaintiff-appellee Chevron Corporation (“Chevron”), in connection with an $8.646 billion judgment obtained against Chevron in Ecuador (“Ecuadorian Judgment”), by several dozen named plaintiffs from Ecuador’s Lago Agrio area (the “Lago Agrio Plaintiffs” or “LAPs”) represented by the Donziger Firm, for environmental damage in connection with 1960s–1990s oil exploration activities in Ecuador by Texaco, Inc. (“Texaco”), whose stock was later acquired by Chevron.
The district court’s judgment, entered after a bench trial, principally (1) enjoins defendants-appellants from seeking to enforce the Ecuadorian Judgment in any court in the United States, and (2) imposes a constructive trust for Chevron’s benefit on any property defendants-appellants have received or may receive anywhere in the world that is traceable to the Ecuadorian Judgment or its enforcement, based on the court’s findings that the Ecuadorian Judgment was procured through, inter alia, defendants’ bribery, coercion, and fraud, warranting relief against Steven Donziger (“Donziger”) and his Firm under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-1968, and against all defendants-appellants under New York common law.
In February 2011, the trial court in Ecuador entered a judgment in favor of the LAPs awarding $8.646 billion in compensatory damages, plus $8.646 billion in punitive damages unless Chevron issued an apology, for a total of $17.292 billion (“Lago Agrio Judgment” or “Initial Judgment” or “Judgment”). The punitive damages aspect of the award was eventually eliminated on appeal leaving the judgment against Chevron, as modified, at $8.646 billion (the Ecuadorian Judgment).
The present action was commenced by Chevron in 2011 against Donziger, his Firm, and the named Lago Agrio Plaintiffs, including Camacho and Piaguaje (referred to in the district court and this opinion as the “LAP Representatives”), alleging that the LAPs procured the Lago Agrio Judgment by a variety of unethical, corrupt, and illegal means, including: making secret payments to industry experts who would submit pro-LAPs opinions to the court while pretending to be neutral; announcing multi-billion-dollar remediation cost estimates while knowing them to be without scientific basis; persuading an expert to sign blank pages that were then submitted to the court with opinions he did not authorize; employing extortion to coerce an Ecuadorian judge to curtail inspections of alleged contamination sites after the experts began to find pro-Chevron conditions at other such sites; using the same extortionate means to coerce that judge to appoint, as a supposedly neutral expert court adviser, an expert who was bribed to submit—as his own opinion—a report written by the LAPs; and providing ex parte to another judge—or to whoever wrote the $17.292 billion Lago Agrio Judgment—material that is not part of the record for inclusion in that judgment.
Chevron originally sought damages and a global injunction forbidding enforcement of the Lago Agrio Judgment. Initially, the district court bifurcated the case and granted Chevron’s request for a global preliminary injunction, citing New York’s Uniform Foreign Country Money-Judgments Recognition Act (the “Recognition Act”), N.Y. C.P.L.R. §§ 5301–5309 (McKinney 2008). After an earlier decisions of the Second Circuit Chevron gave up its claim of damages and sought only injunctive relief.
The Scope of the Trial in the Present Case
The judgment now on appeal was entered after a seven-week trial at which the evidence included live testimony from more than 30 witnesses, 25 of whom were called by Chevron; deposition testimony of 22 witnesses, all presented by Chevron; and more than 4,000 documents.
The issues in the present case concerned the conduct of—not the environmental issues in—the Lago Agrio Litigation. Before making its findings of specific facts as to the issues in this case, the trial court stated: “The issue here is not what happened in the Orienté more than twenty years ago and who, if anyone, now is responsible for any wrongs then done. It instead is whether a court decision was procured by corrupt means, regardless of whether the cause was just. An innocent defendant is no more entitled to submit false evidence, to coopt and pay off a court-appointed expert, or to coerce or bribe a judge or jury than a guilty one. So even if Donziger and his clients had a just cause—and the Court expresses no opinion on that—they were not entitled to corrupt the process to achieve their goal.”
The court made extensive factual findings as to the acts undertaken by Donziger to procure the Lago Agrio Judgment, including the following. None of them is disputed.
- Donziger Attempts To Intimidate Chevron Into Settling by Trumpeting a Huge Remediation Cost Estimate Based Only on “SWAG”
- Donziger Causes a Change to Less Probative Tests When the LAPs’ Experts Find Pollution that Likely Was Not Caused by Texaco
- Donziger Knowingly Submits to the Court Reports that Falsify a LAPs’ Expert’s Conclusions
- Donziger Secretly Hires Industry Experts To Offer Their Supposedly Neutral Monitoring Services to the Court, But To Disagree With Any Pro-Chevron Findings
- Donziger, Anticipating Additional Pro-Chevron Testing Results, Coerces then-Presiding Judge Yánez To Cancel Most of the Remaining Site Inspections
- Donziger Coerces Judge Yánez To Appoint a “Global” Expert—Cabrera—Who “[W]ould [T]otally [P]lay [B]all With” the LAPs
- Donziger and the LAPs Plan the Cabrera Report and Begin To Pay Him Secretly
- Donziger and the LAPs’ Team Control Cabrera’s “Work,” While Denying Any Contact or Involvement
- The LAPs’ Consultant, Stratus, Writes Cabrera’s Report
- Donziger Has Stratus Fabricate Objections To Be Submitted By the LAPs to the Cabrera Report that Stratus Wrote For the LAPs
- When “Crude” Is Released and Chevron Gets Discovery Revealing the LAPs-Cabrera Collaboration, Donziger Hires New Consultants To “Cleanse” the Cabrera Report
Findings by the District Court as to the Sources and Authorship of the Lago Agrio Judgment
Zambrano, who was the judge presiding over the case when the Lago Agrio Judgment was issued, testified in the present action that he had written the single-spaced, 188–page Lago Agrio Judgment without any assistance from anyone other than an 18–year–old typist to whom he dictated the entire decision. The Judgment and the clarification order stated that the court had not relied on the Cabrera Report. And Zambrano testified that he relied only on evidence in the record. The district court found that each of these representations was false.
The Lago Agrio Judgment Drew Heavily on the Cabrera Report
Notwithstanding the disclaimers in the Lago Agrio Judgment and clarification order, the district court found that the principal aspects of that Judgment were drawn from the Cabrera Report. For example, of the $8.646 billion awarded for, inter alia, harm to the environment and human health, $5.4 billion was awarded for remediation of soil at “ ‘880 [waste] pits’ ” in the Concession area, supposedly “ ‘proven through aerial photographs’ ” in “ ‘the record,’ ” Donziger, 974 F.Supp.2d at 682 n.53 (quoting Lago Agrio Judgment).
In sum, the trial court found that the Judgment, although it purported not to rely on the Cabrera Report, did so rely at least (1) for the pit count—which drove its largest damages award [$5.4 billion], (2) for the potable water damages award [$150 million], and (3) by virtue of its reliance on the Barnthouse report [$200 million].
Then–Presiding Judge Zambrano Did Not Write the Lago Agrio Judgment
The district court also found that Zambrano did not write the Judgment, at least in any material part. In light of Zambrano’s “astonishing[ ] unfamiliar[ity] with important aspects of [the Judgment’s] contents,” along with the “evasive[ness] and internal [ ] inconsisten[cies]” in his trial testimony and the differences between his trial testimony and “his deposition just days before,” the district court found that “Zambrano did not write the Judgment issued under his name.”
The Lago Agrio Judgment Was Written by the LAPs
Having found that Zambrano did not write the Lago Agrio Judgment, the district court found—based in part on comparisons of the Judgment against internal LAPs’ documents, which were produced in discovery in the present action but were nowhere to be found in the Lago Agrio Chevron case record—that the Lago Agrio Judgment had been written by the team representing the LAPs.
The Judgment Copied Documents That Were Not in the Court Record but Were LAPs’ Internal Documents
The district court noted that the record in the Lago Agrio Litigation consisted of the documents duly filed with the clerk of court; that “[c]onsideration of any other materials, including any materials provided to a judge or court official informally or ex parte, would have been improper under Ecuadorian law”; and that Zambrano testified that “he considered only documents that were in the court record.”
The district court noted that “[t]he fundamental point … is not that the Judgment came to mistaken or odd conclusions about the law of the United States or Australia. It instead is that both the Moodie Memo written at the instruction of Donziger and the Judgment made the same mistakes in characterizing them. Nothing in the Moodie Memo appears anywhere in the Lago Agrio Record.
The LAPs’ Team Prepared the Judgment, Beginning Work on It as Early as mid-2009
In all the circumstances, the district court found “that the LAPs wrote the Judgment in its entirety or in major part and that Zambrano made little or no contribution apart from his signature and perhaps some light editing designed to make it read more like other decisions he had signed in this and other cases.”
The LAPs Bribed Zambrano To Sign the Judgment They Wrote
The district court found that the LAPs bribed Zambrano to allow them to write the Judgment in the Lago Agrio Chevron case (or “Chevron case”) and that this bribe was facilitated by Guerra. Guerra so testified at trial.
The Final Judgment in the Present Action
The district court concluded that Donziger and the LAPs’ team of attorneys, investors, experts, and consultants constituted a RICO enterprise, and that Donziger had conducted the affairs of that enterprise in a pattern of racketeering activity. Having found that Donziger “and the Ecuadorian lawyers he led,” in representing the LAPs, “corrupted the Lago Agrio case” by, inter alia,
- “submitt[ing] fraudulent evidence,”
- “coerc[ing] one judge” to use a single, “supposedly impartial, ‘global expert’ to make an overall damages assessment” for the judge,
- “hand-pick[ing]” and illegally “pa[ying]” an expert who would “ ‘totally play ball’ with the LAPs” in making such a damages assessment for the judge,
- coercing that judge to appoint Donziger’s “hand-picked” expert as the court’s “ ‘global expert,’ ”
- “pa[ying] a Colorado consulting firm secretly to write all or most of the global expert’s report,”
- “falsely present[ing] the report as the work of the court-appointed and supposedly impartial expert,”
- fraudulently having the Colorado firm write supposed criticisms by the LAPs of the expert’s report that that firm had written for the LAPs, to cause it to appear that the expert was impartial and his report neutral, rather than, as in fact it was, written by agents of the LAPs,
- telling “half-truths or worse to U.S. courts in attempts to prevent exposure of that and other wrongdoing,”
- having “the LAP team wr[i]te the Lago Agrio court’s Judgment themselves,”
- and “promis[ing] $500,000 to the [then-presiding] Ecuadorian judge” in exchange for his agreement “to rule in the[ LAPs’] favor and sign their judgment,” (Donziger, 974 F.Supp.2d at 384; see id. at 443-45)
The district court concluded that “[i]f ever there were a case warranting equitable relief with respect to a judgment procured by fraud, this is it.”
The court noted that fraud in its procurement is an ancient basis for enjoining enforcement of or granting other equitable relief with respect to a judgment where other requisites of the exercise of equitable power are present.
The RICO-Based Rulings Against Donziger
Chevron asserted RICO claims against Donziger and others (not including the LAPs), alleging that, in orchestrating the frauds, extortions, and briberies leading to the entry of the $17.292 billion Lago Agrio Judgment, Donziger conducted the affairs of an enterprise through a pattern of racketeering activity, in violation of 18 U.S.C. § 1962(c), and conspired to do so, in violation of § 1962(d).
RICO Injury and Causation
After Donziger promised Judge Zambrano $500,000 from the proceeds of a judgment in favor of the LAPs, Judge Zambrano entered the Lago Agrio Judgment, which had been written by the LAPs’ team, against Chevron for $8.646 billion in damages (plus $8.646 billion in punitive damages, which was thereafter eliminated by the National Court because Ecuadorian law does not authorize the imposition of punitive damages). Thus, Chevron has an $8.646 billion judgment debt. The imposition of a wrongful debt constitutes an injury to one’s business or property.
The Availability of Equitable Relief Under RICO
Donziger contends that the District Court Judgment against him should be overturned on the ground that RICO does not authorize the granting of equitable relief to a private plaintiff.
The Second Circuit interpreted § 1964(c) as not authorizing awards of treble damages or attorneys’ fees to the United States. Subsection (c) allows awards of that type of relief to a “person,” a term defined as “any individual or entity capable of holding a legal or beneficial interest in property,” 18 U.S.C. § 1961(3). And while the United States is capable of owning property, the term “person” in RICO is used in § 1964 to apply both to potential plaintiffs (subsection (c)) and to potential defendants (subsection (a). In sum, the Second Circuit rejected Donziger’s contention that RICO does not authorize the granting of equitable relief to a private plaintiff that has proven injury to its business or property by reason of a defendant’s violation of § 1962.
The Availability of Equitable Relief Under New York Common Law
Chevron did not assert RICO claims against the LAPs, and the district court based its grant of equitable relief against the LAP Representatives—for procurement of the Judgment by means of fraud—on principles of common law.
The LAP Representatives are indigenous people living in the Ecuadorian rainforest. Both they and Donziger repeatedly have cited their lack of resources as reasons to delay this action. Donziger’s claim, in particular, is strikingly at odds with innumerable representations to this Court concerning his claimed lack of resources. In such circumstances, the theoretical availability of an action [by Chevron] for damages is and always was entirely immaterial. As Justice Scalia has written, while economic injury usually “is not considered irreparable, … that is because money can usually be recovered from the person to whom it is paid. If the expenditures cannot be recouped, the resulting loss may be irreparable.” That is this case.
The district court noted that “the Judgment has been enforceable in Ecuador, and elsewhere, at least since the intermediate appellate court ruled,” and “[a]ssets already have been seized in Ecuador.” Donziger, 974 F.Supp.2d at 637. The court noted that even if Chevron could pursue its claims of LAPs’ team corruption in Ecuador’s Constitutional Court (a route never suggested by the opinions of the Ecuadorian Appeal Division or National Court, which referred only to the actions in the United States “[g]iven the size of the Judgment and the comparative impecuniousness of the defendants, there is no assurance that Chevron could recoup property applied to the Judgment between now and any decision by the Constitutional Court even if it prevailed.” Donziger, 974 F.Supp.2d at 637. The district court also noted that Donziger and the LAPs had, in addition, “taken extensive steps to ensure that any funds recovered are held offshore and beyond the reach either of U.S. or Ecuadorian courts.” Id.
Nor does Chevron’s right to defend against enforcement actions provide a basis for finding that it has an adequate remedy at law, given that the Donziger and Invictus strategy is to inundate Chevron with such actions, forcing it to incur sizeable legal fees. Even if Chevron prevailed in every such action, its legal expenses would likely not be recoverable from the impecunious LAPs or Donziger.
The Second Circuit concluded that the district court had authority under New York common law to grant equitable relief against Donziger and the LAP Representatives over whom the court had personal jurisdiction.
Responsibility of the LAPs for the Misconduct of Their Attorneys
The LAP Representatives contend that any misdeeds by Donziger did not provide a basis for the district court to grant relief against them, arguing that they were unaware of any misconduct, “had absolutely no control over the[ir] so-called ‘agents,’ ” and are simply “unsophisticated client-principals following the lawyers’ lead”.
As an initial matter, there is no authority suggesting that a party ignorant of its attorney’s fraudulent actions may enforce a fraudulently procured judgment. To hold otherwise would run afoul of the Supreme Court’s warning that fraud “is a wrong against the institutions set up to protect and safeguard the public, institutions in which fraud cannot complacently be tolerated consistently with the good order of society.” Hazel–Atlas Glass Co. v. Hartford–Empire Co., 322 U.S. 238, 246 (1944). Even innocent clients may not benefit from the fraud of their attorney.
It is well established that a principal is subject to liability to a third party harmed by an agent’s conduct when the agent’s conduct is either within the scope of the agent’s actual authority or ratified by the principal.
The district court found the LAP Representatives liable on the basis that they (along with the other LAPs) retained Donziger as their attorney and gave Fajardo power of attorney. This finding is amply supported by the record, as the LAPs in November 2010 granted Fajardo a new power of attorney that expressly ratified all of his prior acts, direct or indirect, in pursuit of their litigation interests.
Appropriateness of the Equitable Relief Granted
The relief tailored by the district court, while prohibiting Donziger and the LAP Representatives from seeking enforcement of the Ecuadorian judgment in the United States, does not invalidate the Ecuadorian judgment and does not prohibit any of the LAPs from seeking enforcement of that judgment anywhere outside of the United States. What it does is prohibit Donziger and the LAP Representatives from profiting from the corrupt conduct that led to the entry of the Judgment against Chevron, by imposing on them a constructive trust for the benefit of Chevron. Assets acquired by fraud are subject to a constructive trust for the benefit of the defrauded party. SEC v. Credit Bancorp, Ltd., 290 F.3d 80, 88 (2d Cir. 2002).
Given all of the above considerations, including the Ecuadorian courts’ statements deferring to the United States courts for adjudication of Chevron’s allegations of corruption by the LAPs’ legal team. above, and the district court’s unchallenged findings of fact as to the fraud, coercion, and bribery engaged in by the LAPs’ team, the judgment of the district court was affirmed.
The 127-page ruling is an emphatic affirmation of Judge Lewis Kaplan’s 2014 decision, which came after a bench trial on Chevron’s claims against Donziger under the Racketeer Influenced and Corrupt Organizations Act, or RICO. Just because Chevron is an unpopular and gigantic oil company it should never be the victim of a fraud. It fought back against a fraudulently obtained $8 billion judgment and won. Even the poor alleged victims of the actions alleged by Donzinger and the plaintiffs they should never be allowed to profit from the fraud of their lawyers. Even if they collect the judgment it must be held for the benefit and in trust for Chevron. The plaintiffs are not without a remedy. They can sue their lawyers for the fraud that lost them their $8 billion judgment. Why Donzinger is still licensed to practice law I leave to his local and federal bar associations.
© 2016 – Barry Zalma
Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
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