The case of the day is Crystallex International Corp. v. Petróleos de Venezuela (D. Del. 2016). Crystallex was a Canadian corporation that had brought an ICSID arbitration against Venezuela, relating primarily to Venezuela’s denial of a permit to allow Crystallex to mine gold deposits in the Las Cristinas area and to the decision of a state-owned economic development company, Corporación Venezolana de Guayana, to rescind a mining contract with Crystallex. The arbitration resulted in an award of more than $1.2 billion in damages to Crystallex.
In today’s case, Crystallex alleged that Venezuela, in anticipation of the award, had “orchestrated a scheme to monetize its American assets and pull the proceeds out of the United States, in order to evade potential arbitration creditors.” In particular, it alleged that Venezuela and its state oil company, Petróleos de Venezuela, cause CITGO, a subsidiary of Petróleos de Venezuela, to issue $2.8 in debt and then to pay the proceeds of the issuance to Petróleos de Venezuela in the form of a dividend. The main claim was for fraudulent transfer under the Uniform Fraudulent Transfer Act. CITGO moved to dismiss for failure to state a claim. (Note that I’m simplifying things a bit—there actually were two levels of subsidiaries, with the indirect subsidiary paying a dividend to the direct subsidiary and the direct subsidiary then paying a dividend to Petróleos de Venezuela. I’m using the name CITGO to refer to both, even though ultimately CITGO was dismissed from the case and the other subsidiary, PDV Holding, Inc., was not. This is mainly so I can use the picture of the CITGO sign, a Boston landmark).
On the fraudulent transfer count, CITGO’s argument was that the funds that it transferred to Petróleos de Venezuela were its funds, not Petróleos de Venezuela’s funds. Since Petróleos de Venezuela, not CITGO, was the award debtor, there was no transfer, let alone a fraudulent transfer. “A corporate parent which owns the shares of a subsidiary does not, for that reason alone, own or have legal title to the assets of the subsidiary.” Dole Foods Co. v. Patrickson, 538 U.S. 468, 475 (2003). The court rejected Crystallex’s argument that it should look at the “economic reality” of the transactions, noting that “Delaware public policy does not lightly disregard the separate legal existence of corporations.” I trust that by now all Chevronologists reading this understand why I’m taking time to discuss the UFTA issue in any depth—Crystallex, the Canadian corporation, is making the same argument here that the Lago Agrio plaintiffs are making to the Canadian court. But I digress. Although the court was basically sympathetic to CITGO’s view, it held that in the brief period between when CITGO declared the dividend and when it paid the dividend to Petróleos de Venezuela, Petróleos de Venezuela did have a property interest in the funds that Crystallex might have reached to satisfy the judgment. CITGO argued that only transfers “by” the debtor can be fraudulent transfers within the meaning of the statute and that here, Petróleos de Venezuela (the debtor) had made no transfer. But the court read the word “by” broadly to include “through the agency or instrumentality of” or “on behalf of.” Reading the word that broadly, it held that the complaint stated a claim.
CITGO went on to make another interesting argument. The FSIA prohibits attachments prior to judgment. 28 U.S.C. § 1610(d). The gist of the argument was that since Crystallex couldn’t have stopped the transfer from happening before hand, it can’t seek to impose liability on account of the transfer. This is creative but pretty clearly wrong. Just because the property couldn’t be attached earlier doesn’t mean that any transfer of the property earlier was lawful.