Venezuela: Third Circuit Affirms Crystallex Attachment Of Citgo Shares

First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement.

This month, we focus on the latest decision in the ongoing saga of Crystallex International Corporation versus Venezuela. As has been widely reported, the United States Court of Appeals for the Third Circuit affirmed the Delaware District Court's order granting a writ of attachment of shares in the US-based holding company that owns Citgo. Crystallex Int'l Corp. v. Venezuela, Nos. 18-2797 & 18-3124, Slip Op., (3d Cir. July 29, 2019) (Crystallex Op.). This is a subject matter we know well – for over a decade, the authors of this First Tuesday Update represented ExxonMobil in its successful efforts to receive compensation from PDVSA and Venezuela, following Venezuela's expropriation without compensation of an ExxonMobil subsidiary's rights and interests in a joint venture. 

Crystallex covers virtually every aspect of the issues we examine in these updates: investor-state international arbitration, judgment enforcement, veil piercing, and foreign sovereigns. And one aspect of the case has been underreported – even though Crystallex prevailed on its appeal, the Third Circuit made clear that the Treasury Department's Office of Foreign Asset Control (OFAC) is likely to have the final say. "[A]ny attachment and execution against PDVSA's shares of PDVH would likely need to be authorized by the Treasury Department." Crystallex Op. at 43. The decision also has bondholders, other creditors, and customers concerned about – and interested in – this decision’s impact. Our prediction – Crystallex is unlikely to obtain the shares soon and this case is almost certainly headed to the Supreme Court. 

The Third Circuit decision is the latest in a line of decisions from ICSID to Washington, DC courts, to Delaware involving this case. In 2002, Crystallex contracted with a Venezuelan entity for the exclusive right to extract gold from one of the world's largest deposits in Las Cristinas, Venezuela. In 2011, Venezuela expropriated the gold mines without compensation. Later that year, Crystallex filed for ICSID arbitration and then sought bankruptcy protection in Canada. 

While the arbitration was pending (and then after the award was announced), Crystallex pursued claims against PDVSA, Citgo, and Citgo's holding company, PDVH, for fraudulent transfers under the Delaware Uniform Fraudulent Transfer Act. In those cases – which is different from this current case – the Third Circuit reversed the district court's decision, holding that a transfer from a non-debtor could not be a fraudulent transfer. Crystallex Int'l Corp. v. Petroleos de Venezuela, S.A., 879 F.3d 79, 81-82 (3d Cir. 2018). In addition, there were serious questions there about whether – under the Foreign Sovereign Immunities Act (FSIA) – Crystallex could obtain any pre-judgment relief against Venezuela or its state-owned entities. 

In April 2016, Crystallex received an ICSID award of US $1.2 billion plus interest. Crystallex sought to confirm its award as a judgment in the US District Court for the District of Columbia. The DC District Court confirmed the award as a judgment, which the DC Circuit affirmed. Thereafter, pursuant to 28 U.S.C. § 1963, Crystallex registered its DC judgment in Delaware and commenced enforcement proceedings. 

One of Crystallex's first enforcement steps was to seek an attachment action against PDVH shares (Citgo's US-based parent company), owned by PDVSA, which Crystallex asserted was the alter ego of Venezuela. Ultimately, the Delaware District Court agreed in 2018 and issued an order attaching PDVH's shares. On appeal, the Third Circuit affirmed the district court’s decision. 

The Third Circuit's analysis is thorough and covers several issues. First and foremost, Venezuela argued that simply registering a judgment under 28 U.S.C. § 1963 does not confer jurisdiction against a foreign sovereign. The Third Circuit rejected that argument – the question is whether the court that issued the original judgment had jurisdiction, and if it did, then so too does the court in which a judgment is registered. 

The Court next analyzed whether it has subject matter jurisdiction over an alter ego without establishing an independent basis for subject-matter jurisdiction. This could be an issue to watch since the holding here that jurisdiction can be extended to an alter ego without an independent basis could be in tension with the Supreme Court’s decision in Peacock v. Thomas, 516 U.S. 349, 356, 359 & n.7 (1999). But the issue is perhaps resolvable here because federal courts could have an independent basis for jurisdiction over a foreign state’s instrumentalities like PDVSA the FSIA confers jurisdiction on federal courts over foreign sovereigns if an exception to immunity is satisfied. But meeting an exception to immunity alone may be insufficient; it could be that the FSIA also requires service of process, personal jurisdiction and venue. See Mobil Cerro Negro, Ltd. v. Bolivarian Republic of Venezuela, 863 F.3d 96, 102–03 (2d Cir. 2017) (holding that as against sovereigns, the FSIA requires a plenary action to enforce an arbitral award as a judgment; it cannot be recognized in an ex parte, summary procedure). It remains to be seen how the Supreme Court chooses to analyze the issue or whether Peacock will be clarified in any potential subsequent proceedings.  

The Third Circuit then applied the Bancec factors, which is part of a well-known test established by the Supreme Court to assess veil piercing as among foreign sovereigns and their agents and instrumentalities. Here, the district court’s material finding was that Venezuela extensively controlled PDVSA. The Third Circuit also said that Crystallex need not show a direct link between Venezuela’s control over PDVSA and specific injury or harm to it. Accordingly, an alter ego finding was well-founded and affirmed. There was some additional fencing about the appropriate timing on when to consider "control" since a new Venezuelan government may not exercise the same level of control over PDVSA. The Court found the evidence sufficiently established control as of now. 

Even though PDVSA was an alter ego of Venezuela, Crystallex still had to show that the particular property at issue in the attachment action – the PDVH stock – was not immune under the FSIA. Immunity from attachment and execution is specifically governed by Section 1610 of the FSIA. Even though the FSIA draws a distinction between immunity for a foreign state versus agents and instrumentalities, the Court analyzed the issue under the protections for a foreign state, Section 1610(a), since PDVSA was being reached as an alter ego of Venezuela and not as an agent or instrumentality in its own right. The Court found that the property was "used for a commercial activity in the United States" and was being executed based upon a judgment entered by US court that confirmed an arbitral award against the foreign state. 28 U.S.C. § 1610(a)(6); Crystallex Op. at 40-41.  

Bondholders and other creditors intervened in the case to say that veil piercing, as an equitable remedy, should make due provision for the rights of third parties. The Court's response was that attachment will not impair the bondholders' rights. In any execution sale, the successful purchaser will take the ownership of the entity subject to all of the rights, liens, and other obligations Citgo (and its corporate parents) currently have. The successful purchaser steps into the shoes of the current owner. The same is true for existing suppliers and customers of Citgo who may wonder about their contracts – just like any other sale, the new owner cannot abandon the company’s liabilities simply because of a change in ownership. 

The final issue raised by the Court was the impact sanctions may have on Crystallex's ability to sell the attached shares. It seems almost certain that OFAC would need to approve of any sale, which will be analyzed on a case-by-case basis. Where the current administration is on this issue is the most important question and we doubt there will be a clear answer soon. As recently as yesterday, President Trump escalated the pressure against the Maduro regime by issuing an Executive Order imposing a total economic embargo against the Government of Venezuela.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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