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Third Circuit Holds Transfer from Non-Debtor Precludes Liability Under Delaware Fraudulent Transfer Law

In Crystallex Int'l Corp. v. Petróleos de Venez., S.A., Nos. 16-4012, 17-1439, 2018 U.S. App. LEXIS 95 (3d Cir. Jan. 3, 2018), the U.S. Court of Appeals held there could be no fraudulent transfer liability under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) where the transfer was made by a non-debtor entity—even where the debtor exercised complete control over the non-debtor and allegedly orchestrated transfers through the non-debtor to frustrate creditors. 

On January 17, Crystallex International (which lost on appeal) filed a petition for panel rehearing or for rehearing en banc, arguing that the Court’s decision is in conflict with existing Third Circuit precedent and case law from the Seventh Circuit.  The Third Circuit has not yet ruled on that petition.

Crystallex is a Canadian gold producer that owned the rights to a gold reserve in Venezuela.  This appeal arose out of a dispute between Crystallex and the Venezuelan government.  In 2011, Venezuela nationalized its gold mines and appropriated Crystallex’s mining rights.  Crystallex subsequently won over $1.2 billion in an arbitration proceeding over that appropriation.

In response, Venezuela purportedly took steps to thwart Crystallex from enforcing the arbitration judgment by “orchestrat[ing] a series of debt offerings and asset transfers” between corporate entities under its control.  Venezuela owns 100% of Petróleos de Venez., S.A. (“PDVSA”), an oil and natural gas company (which Crystallex alleges to be Venezuela’s alter ego).  PDVSA is the whole owner of PDV Holding, Inc. (“PDVH”), which controls 100% of CITGO Holding, a Delaware corporation that in turn owns the CITGO petroleum business in the United States.  According to Crystallex, through these intermediary corporations Venezuela caused CITGO Holding to issue $2.8 billion in debt, which was transferred through the corporate structure as a series of dividends—and ultimately repatriated to Venezuela. 

The Delaware district court held that Crystallex could challenge the transfers as fraudulent under DUFTA.  After accepting the case for interlocutory review, the Third Circuit reversed in a 2-to-1 split.

The majority’s analysis is premised on the fact that Crystallex’s only potential debtors were Venezuela and its purported alter ego, PDVSA.  The majority emphasized that DUFTA, by its terms, only applies to a transfer “by a debtor.”  6 Del. C. § 1304.   Thus, it reasoned, the transfer from PDVH to PDVSA could not fall within the reach of the statute because PDVH was not a debtor to Crystallex. 

The majority rejected Crystallex’s theory that this transfer fell within the scope of DUFTA because it was part of a scheme designed by Venezuela to place its U.S.-based assets out of Crystallex’s reach.  This theory failed because Crystallex had not alleged that PDVH itself was a debtor to Crystallex or otherwise liable under the arbitration judgment.  Although Crystallex made detailed arguments for why PDVSA was Venezuela’s alter ego, it provided no basis to show that PDVH was an alter ego of either Venezuela or PDVSA.  Accordingly, the majority explained, the transfer through PDVH was not covered by DUFTA—holding otherwise would “undermine a fundamental precept of Delaware corporate law: parent and subsidiary corporations are separate legal entities.”  2018 U.S. App. LEXIS 95, at *12.

In a sharp dissent, Senior Judge Julio Fuentes argued that the majority’s interpretation “does not comport with—but rather is wholly contrary to—[DUFTA’s] broad remedial purpose.”  Id. at *26.  Given Venezuela’s efforts to move assets out of the reach of Crystallex and other creditors, he argued, equitable principles supported the conclusion that the transfers were challengeable under DUFTA.  Judge Fuentes reasoned that, because the dividend payment from PDVH to PDVSA was done at the behest of Venezuela, it should be regarded as a transfer “by a debtor” and thus fall within DUFTA.

Earlier this week, Crystallex filed a petition requesting that the case be reheard either before the three-member panel or the full Third Circuit sitting en banc.  That petition argues that the majority’s decision (a) misinterprets Delaware law on the scope of DUFTA; (b) overlooks the Third Circuit’s decision in In re Wettach, 811 F.3d 99 (3d Cir. 2016), which addressed the “broad scope” of Pennsylvania’s fraudulent transfer statute; and (c) is in direct conflict with the Seventh Circuit’s decision in Continental Casualty Co. v. Symons, 817 F.3d 979 (7th Cir. 2016), which held as fraudulent a transfer structured to hinder creditors even though the transferor was not the debtor itself.  The Court has not yet ruled on that petition.