Chevron’s latest headache in $19 billion lawsuit by Roger Parloff @FortuneMagazine July 22, 2013, 5:59 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons FORTUNE — Chevron has recently enjoyed a string of victories in its battle against an allegedly fraud-ridden $19 billion environmental judgment handed down by an Ecuadorian court in 2011, with courtroom wins in Argentina and Canada, and recantations and confessions by former plaintiffs’ team members and allies. But the energy giant now faces an ominous challenge in federal appeals court in Manhattan. The appeal has arisen in the civil RICO (Racketeer Influenced and Corrupt Organizations Act) case Chevron CVX filed in 2011 in Manhattan against leaders of the Amazon Defense Front, the group bringing the suit against Chevron in Lago Agrio, Ecuador. The Front alleges that a Texaco subsidiary befouled the Ecuadoran Amazon when it operated an oil-drilling consortium there from 1964 to 1990. In the RICO suit, Chevron, which acquired Texaco in 2001, claims that Front leaders, including its lead American attorney and strategist Steve Donziger, won the $19 billion judgment fraudulently and by breaking U.S. laws against extortion, mail fraud, wire fraud, witness tampering, obstruction of justice, and money laundering. The RICO case is set to go to trial on October 15 before U.S. District Judge Lewis Kaplan. In its appeal, Donziger and the other RICO defendants are trying to have Judge Kaplan removed, which would probably delay the trial and plop at its helm a relative judicial naïf, unfamiliar with the case’s 20-year history of sprawling, multifaceted, fraud-marred, and bombastically propagandized litigation. The appeal is the RICO defendants’ sixth attempt to toss Kaplan, whom they have also targeted in a public relations campaign. (Front lawyers, spokespersons, and agents have accused the federal judge of running a “show trial,” of being “corrupt” and “racist,” of being “open for Chevron’s business,” of being Chevron’s “lackey,” and so on.) This time, instead of arguing simply that Kaplan is biased — a claim they have repeatedly lost — they are alleging that Kaplan has “thumbed [his] nose at” the federal appeals court itself by disregarding an earlier ruling it rendered in the case, and that this alleged recalcitrance on Kaplan’s part shows the irremediable depths of his alleged bias, necessitating his removal. Kaplan’s fatal, hubristic misstep, as the RICO defendants hope the appeals court will see it, was his acceptance, in a July 2012 order, of Chevron’s argument that he was entitled to rule on the enforceability of the Ecuadoran court’s judgment under New York law. Just six months earlier, in January 2012, the U.S. Court of Appeals for the Second Circuit blocked Kaplan from rendering such a ruling in a different context. The RICO defendants claim that Kaplan thereby lawlessly defied the appellate court. Chevron maintains that, on the contrary, Kaplan’s July 2012 ruling was wholly consistent with the Second Circuit court’s earlier opinion. (The Second Circuit has given Judge Kaplan an opportunity to file his own brief, due July 30, though it’s unclear if he’ll do so.) Formally, what the RICO defendants are pursuing here is a “mandamus action,” not an appeal. It’s a procedure used when a party claims that the trial judge has committed an abuse of discretion so egregious that it requires immediate appellate intervention even though the party isn’t in a position that would ordinarily allow for an appeal. MORE: Amazon vs. your public library Because mandamus is an “extraordinary” remedy, appellate courts dismiss most such petitions without even asking for responses from opposing counsel. So the fact that the Second Circuit is taking this petition seriously enough to order Chevron to respond — as it did in June — is news, as is the fact that it has also ordered, over Chevron’s objections, that the matter be placed on an expedited hearing schedule. The appeals panel that ordered Chevron to respond includes U.S. Circuit Judge Gerard E. Lynch, who authored the Second Circuit ruling Kaplan is being accused of flouting. (The other panelists are Circuit Judges Peter W. Hall and Ralph K. Winter.) Perhaps alarmed by the appellate court’s ominous level of interest in the petition, the National Chamber Litigation Center — the litigation arm of the Chamber of Commerce — belatedly petitioned for permission to file an amicus brief opposing the ouster of the trial judge. The Chamber’s brief will be written by Michael Mukasey, a partner at Debevoise & Plimpton who was the Attorney General of the United States from 2007 to 2009 and a former federal district judge in Manhattan for 18 years before that. (Mukasey and the Chamber declined to offer comment for this article.) The RICO defendants’ lead counsel in the mandamus action is James Tyrrell, Jr., of Washington, D.C.’s Patton Boggs. (Patton Boggs is being paid on a partial contingency basis, and stands to recover hundreds of millions of dollars if the allegedly fraudulent judgment can ever be collected.) Chevron is represented by Randy Mastro of Gibson Dunn & Crutcher. Here’s the essential background. The Ecuadoran plaintiffs originally sued Texaco in Manhattan in 1993. In 1998, U.S. District Judge Jed Rakoff dismissed the case on, among other grounds, “forum non conveniens,” a doctrine that means that the case could better be heard in another country — in this case, Ecuador. The Second Circuit upheld the dismissal based on the condition that Texaco agree to be bound by an Ecuadorian court judgment if the plaintiffs filed a new suit there. Texaco agreed, so long as such a judgment met the minimum standards required by the New York Recognition of Foreign Judgments Act. That law says — as do similar laws in virtually every state — that, to be enforceable, a foreign judgment must not have been procured by fraud, and the parties must have been afforded minimal due process. Texaco’s proviso was fine with the court of appeals, which dismissed the case in 2002. In 2003, many of the same plaintiffs and lawyers filed a new version of the suit in Lago Agrio, Ecuador. Eight years later, in February 2011, the Lago Agrio court handed down an $18 billion judgment against Chevron, later bumped up to $19 billion. About two weeks before the Ecuadoran judgment came down, Chevron filed the civil RICO case in Manhattan. Originally, the focus of that suit was an elaborate three-year fraud in which Donziger and other RICO defendants allegedly ghostwrote a crucial damages report and passed it off on Ecuadoran and U.S. courts and journalists (including me) as the work of an independent court-appointed expert. In July 2012, U.S. district judge Lewis Kaplan found that, based on the evidence the parties had submitted, this fraud “unquestionably” occurred. As shocking as that fraud was, it was soon eclipsed. Snowballing new evidence pointed toward an even greater possible fraud: the likelihood that the Amazon Defense Front’s lawyers secretly ghostwrote the entire 188-page, $19 billion Ecuadorian judgment, having allegedly been afforded that opportunity by agreeing to pay two Ecuadorian judges $500,000 from the eventual recovery. This past March, Judge Kaplan found that Chevron’s evidence had “established at least probable cause” to believe this fraud had occurred also. MORE: Why Janet Yellen should succeed Ben Bernanke To understand the current mandamus action, the reader has to understand one additional important detail. Chevron has virtually no assets in Ecuador. So to collect on its judgment, the Amazon Defense Front must bring enforcement actions in the courts of other countries where Chevron does have assets. While the most obvious place to bring such an action would be the United States, where Chevron is based, most U.S. states don’t permit enforcement of a foreign judgment that has been procured by fraud. So while the Front has so far brought enforcement suits in Canada, Argentina, and Brazil, it has not yet brought one in the U.S. Chevron’s RICO complaint originally included one count that was not brought under RICO but, rather, under the federal Declaratory Judgment Act. In it Chevron sought a preemptive declaration that the Ecuadoran judgment was not enforceable under the New York Recognition of Foreign Judgments Act, even though the Front was not trying to enforce its judgment in New York. Chevron theorized that it could seek a judgment on that question because of the centrality that the New York recognition law had played in the history of the case. When the case was dismissed by U.S. courts in 2002, Texaco agreed to be bound by an Ecuadoran court’s judgment only if it satisfied the New York Recognition of Foreign Judgments statute. After a hearing in March 2011, Judge Kaplan found “ample evidence” to conclude that the Ecuadoran judgment was, in fact, so outlandishly tainted by fraud and afflicted with due process violations that it very likely would not be enforceable under New York law. He then preliminarily barred the defendants from trying to enforce that judgment not only in the U.S., but also — and this was a stretch –anywhere outside of Ecuador. The RICO defendants appealed Kaplan’s ruling to the Second Circuit and won. In January 2012, Circuit Judge Lynch, writing for a unanimous panel, explained that Chevron couldn’t use the Declaratory Judgment Act to get a preemptive ruling on the enforceability of the Ecuadoran judgment under New York law if the RICO defendants weren’t trying to enforce it in New York. Lynch also suggested that Kaplan’s attempt to bar the defendants from trying to enforce the judgment in other courts outside the U.S. was over the line. New York had never intended to “set up its courts as a transnational arbiter to dictate to the entire world which judgments are entitled to respect and which countries’ courts are to be treated as international pariahs,” Lynch wrote. Nevertheless, at the same time, Lynch also acknowledged that New York law did permit its courts to rule on the enforceability of foreign judgments if that issue was raised by the judgment holder in, among other things, “an affirmative defense.” An affirmative defense is a claim a defendant makes when responding to a complaint, which, if valid, would bar the plaintiff from pursuing his suit. Chevron’s lawyers felt that this language gave it the toehold it needed to launch a fresh attempt to get the enforceability issue before Kaplan. Chevron’s new theory was this. Early in the RICO case — and in more than a dozen auxiliary federal court proceedings Chevron filed around the United States from late 2009 to 2012 — the RICO defendants routinely argued that U.S. judges had no authority to rule on Chevron’s fraud charges because the Ecuadoran court already had rejected those allegations. In legal jargon, they argued that U.S. courts were “estopped” from ruling on Chevron’s fraud claims. The RICO defendants even made this contention to the Second Circuit during their first appeal of the RICO case, arguing that “[p]rinciples of estoppel should preclude Chevron from re-litigating its fraud claims in the lower court.” The legal doctrine they were invoking is called “collateral estoppel.” The RICO defendants raised collateral estoppel as an affirmative defense when they filed their answers to the RICO complaint in April 2011. So in early March 2012, barely a month after Circuit Judge Lynch’s ruling took effect, Chevron moved for “partial summary judgment” on the RICO defendants’ collateral estoppel affirmative defense. A decision on that defense would require Kaplan to once again assess whether the Ecuadoran judgment could pass muster under the New York recognition-of-foreign-judgments law. (This was valuable to Chevron because, even if a ruling by Kaplan on that question would not bind foreign courts, such courts might still consider his reasoning.) The RICO defendants first asked for more time to defend their collateral estoppel claims against this unexpected attack — or “ambush,” as they called it in their mandamus papers. Kaplan granted them an extra month, but they then changed tack. The defendants now claimed that the “collateral estoppel” reference in their pleadings had been mere “boilerplate,” that it had never been meant to refer to the Ecuadoran judgment at all, and that it had been intended rather to refer to certain rulings made in the various related U.S. cases that had been filed around the country, though they gave no examples. Later, they offered a few candidates, but none seemed to make any sense in the context of the case. Judge Kaplan rejected the notion that the collateral estoppel defense ever referred to anything other than the Lago Agrio judgment as an “unworthy pretense.” MORE: Detroit’s silver lining Next, the RICO defendants tried to amend their complaint to withdraw their collateral estoppel defenses. But they asked to do so “without prejudice” — meaning that they could still raise collateral estoppel as a defense in other courts. Judge Kaplan said no. “[A]llowing the [RICO defendants] to take the issue of recognizability and enforceability [of the Ecuadorian judgment] off the table in this case,” he wrote, “while preserving it in every other court in this and other nations would be to acquiesce in a blatant exercise in forum shopping.” This is the key sentence — and particularly its passing reference to “courts in . . . other nations” — that the RICO defendants now hope to use, in a judo-like counter-maneuver, to eject Judge Kaplan at last from the case. They argue that the sentence shows that Kaplan is still trying to act as a “transnational arbiter” in defiance of the Second Circuit’s will and must therefore be replaced with another judge. Preferably, no doubt, with someone who will be more timid and gullible when dealing with these accused con men and their attorneys.