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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions