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  HOME | Venezuela (Click here for more Venezuela news)

Venezuela's PDVSA Wins Dismissal from Court of Appeal from Crystallex $2 Billion Fraudulent Transfer Suit

CARACAS -- The U.S. Court of Appeals, in a 2-1 decision, has remanded back to a Federal District Court a ruling dismissing PDVSA from a lawsuit by Crystallex alleging "fraudulent transfer."

"At first glance this case appears exceedingly complex -- with its tangle of debtors, creditors, parents, subsidiaries, alter egos, and complex international corporate transactions," wrote Court of Appeals Judge Rendell for the majority (see Judgment below). "But when one cuts through this morass, the question at the center of this case is quite simple: can a transfer by a non-debtor be a "fraudulent transfer" under the Delaware Uniform Fraudulent Transfer Act (DUFTA)?"

"We are constrained to conclude that a transfer by a non-debtor cannot be a "fraudulent transfer" under DUFTA," the U.S. Court of Appeals for the Third Circuit concluded, admonishing Venezuela's behavior. "While we do not condone the debtor's and the transferor's actions, we must conclude that Crystallex has failed to state a claim under DUFTA."

The 2 judge majority of Justices Vanaskie and Rendell found that Crystallex had a $1.4 billion judgment against Venezuela -- not PDVSA or PDV Holding -- and that PDVSA and PDV Holding were thus not debtors within the meaning of the law and were free to transfer the funds without violating the "fraudulent transfer" statute.

"Crystallex has failed to successfully plead a transfer "by a debtor" and thus failed to successfully plead a fraudulent transfer claim against PDVH under DUFTA," the Court concluded, remanding the case back to the District Court for further hearings "consistent with this opinion."

An Unconsummated Settlement Agreement

In November LAHT broke the news that Crystallex -- owed $1.4 billion for the expropriation of its Venezuela mining subsidiary -- had reached a billion dollar settlement with Venezuela.

But in a filing asking to postpone a hearing in the United States Court of Appeals (document below), Venezuela reveals that it has still not complied with the initial $40 million in payments on the billion dollar settlement that were due November 30 and December 30.

"In support thereof, the parties state that they have signed a settlement agreement that contains certain conditions precedent that Venezuela has not yet satisfied," Venezuela wrote in the motion asking for postponement of the Oral Arguments Hearing scheduled for January 16.

"At Venezuela's request, Appellee Crystallex International Corporation consents to the requested relief and joins in this motion," Venezuela wrote.

"The fact that Crystallex has agreed with the postponement of the hearing for at least six months suggests that they must have had some demonstrated assurance that the initial payments totalling $40 million were on the way," said Russ Dallen, who first broke the news of the settlement last month in the Latin American Herald Tribune. "That could possibly explain the $44 million fall in Venezuela's reserves we saw on December 26."

There was no explanation of why Venezuela had still not paid the initial consideration in the settlement agreement yet but Crystallex, in a footnote, reserved its right "to enforce its judgement pending a resolution of this appeal."

Settlement Agreement Approved in November

The Ontario Superior Court Bankruptcy judge overseeing Crystallex's administration approved a settlement deal last month and ordered most documents sealed at Crystallex's request.

In a later filing, however, the Court-appointed monitor, Ernst & Young revealed some details of the settlement.

According to the Monitor's report (see copy below), Venezuela is to pay roughly $440 million through the end of 2020, which was the Court-ordered limit of what the Monitor could reveal.

"Pursuant to the Supplemental Order this Supplemental Monitor's Report only provides disclosure of payments under the Settlement Agreement to the end of 2020. There are amounts payable to the Applicant pursuant to the Settlement Agreement beyond 2020," the Monitor reports.

According to the payment schedule outlined through 2020, Venezuela was to pay $25 million last month and $15 million in December. In January it is due to pay another $10 million.

"Crystallex has not yet received the first payment under the Settlement Agreement, but has been advised that the initial payment has been initiated by Venezuela," admitted Crystallex CEO Robert Fung, in a Notice of Motion being heard Wednesday, December 19 in bankruptcy court in Toronto. "The complexities of the routing for such payments can result in payments from Venezuela often taking 3 to 4 weeks to be received from initiation, and the Settlement Agreement contains a 30-day cure period for Venezuela to cure any noncompliance with the scheduled payments. Crystallex currently expects that it will be in receipt of all of the funds from the first instalment within the cure period provided for under the Settlement Agreement."

Venezuela will then begin paying "monthly equal payments aggregating US $262,500,000 for the period from February 28, 2018 to December 31, 2020." That averages out to under $8 million a month.

In addition, Venezuela will make "five semi-annual additional payments commencing July 31, 2018, with the first such payment being for approximately $28,100,000, with each subsequent payment being reduced by approximately $1,200,000."

Under the terms so far released, Crystallex will receive approximately $441 million through the end of 2020.

The Settlement Agreement

"Following months of start-stop negotiations with Venezuela, on November 15, 2017, Crystallex (through Venezuela Counsel) concluded the Settlement Agreement. The signed and stamped official version of the Settlement Agreement was received by Crystallex on November 20, 2017," reported Crystallex director Harry Near in the court filing.

"The quantum of recovery that Crystallex will achieve under the Settlement Agreement is extraordinary when compared to the amount of the Award, and I understand this may be the largest settlement that Venezuela has ever agreed to in relation to an arbitral award," Near reported.

Analysts put the recovery somewhere betweeen the $750 million received by Gold Reserve and the $1.4 billion that the 3 member World Bank ICSID arbitration panel had awarded Crystallex.

According to the Court filings, Venezuela has agreed to pay Crystallex "a specified amount of the Award, plus interest."

The Settlement Amount is to be paid in a series of instalments, which include a series of up front instalments, recurring monthly instalments thereafter, and annual instalments until the Settlement Amount has been fully satisfied.

"On its face, the Settlement Agreement should provide value to the Company over time beyond the quantum of asserted creditor claims against the Company," says Near.

"The first instalment is payable on [date redacted], provided other conditions of the settlement have been satisfied; upon payment of the first instalment, the Company will suspend all actions and proceedings it has commenced to enforce the Award and take no further steps to enforce the Award," the court filings say.

"Upon payment of the last instalment, Crystallex will discontinue or terminate all actions and proceedings to enforce the Award."

"If Venezuela breaches any of its payment obligations under the Settlement Agreement, Crystallex will be entitled to re-commence all of its enforcement activities suspended by the settlement, as well as pursue and initiate new enforcement and collection efforts," says Near.

"As we have found out last month with Gold Reserve, the problem now becomes getting the money out of Venezuela," said Caracas Capital head Russ Dallen. "Gold Reserve buried a bombshell over Thanksgiving when it reported its third quarter financials -- Venezuela had been paying its $29.5 million dollar a month settlement payment into a Venezuela state-owned bank in Caracas since August and Gold Reserve had been unable to get that $88.5 million out of Venezuela."

Gold Reserve says Venezuela Payments on $1 Billion Expropriation Stuck by Sanctions in Caracas

"One of the problems with the Settlement Agreement is that it contains strict confidentiality requirements, including restrictions on disclosure of the negotiations that led to the settlement as well as the terms of settlement," says Dallen. "So we don't know exactly what the terms are."

Crystallex "has been advised by Venezuela Counsel and I verily believe that these confidentiality provisions are extremely important to Venezuela because the country still has to deal with and address hundreds of billions of dollars in claims by other creditors," says Near in the court filings. "Given the importance of these confidentiality provisions to Venezuela in particular, the Company cannot make the Settlement Agreement publicly available. The Company will file a copy of the Settlement Agreement under seal and pursuant to an Order of the Court protecting its confidentiality. The Settlement Agreement has been disclosed to the Monitor and its counsel, counsel to the Company's noteholders and equity holders as well as certain other stakeholders, pursuant to the terms of their confidentiality agreements with the Company. The Company has also arranged for the Monitor to offer to provide certain key information concerning the settlement to the Company's stakeholders on a confidential basis through their counsel. The Company's objective is to ensure that its stakeholders can understand the key features of the Settlement Agreement but without breaching the important confidentiality requirements of the Settlement Agreement imposed by Venezuela."

LAHT Successfully Filed an Intervenor Letter to Force the Unsealing of Documents about Crystallex Settlement

Crystallex's Aggressive Legal Strategy

Crystallex -- controlled by a hedge fund with debtor-in-possession financing -- has been one of the most aggressive in pursuing litigation against Venezuela.

In August, for example, lawyers for Crystallex in an ongoing suit against Venezuela, PDVSA and Citgo filed a "Motion for An Order Authorizing the Issuance of a Writ of Attachment Fieri Facias Pursuant to 28 USC 1610(C)", trying to seize PDV Holding, parent of Venezuela's Citgo unit in the USA. The Order is "against its shares, which are wholly owned by Petroleos de Venezuela, S.A. (PDVSA), alter ego of Defendant and Judgment Debtor Bolivarian Republic of Venezuela, and against any other assets or rights that PDVSA may have incident to its ownership of those shares...."

On June 9, after giving Venezuela time to appeal, pay the judgment or post a bond, the U.S. Federal District Court in Washington, D.C. that had upheld and registered the $1.4 billion arbitration award against Venezuela ruled that Crystallex could begin actions to enforce its judgment and seize assets of Venezuela.

On August 9, the U.S. Federal District Court in Washington, D.C. denied Venezuela's request for a stay of enforcement pending its appeal to the U.S. Court of Appeals.

Fieri Facias is Latin for "cause it to be done." A Fieri Facias Writ of Attachment instructs a sheriff to seize and sell a defendant's property in order to satisfy a monetary judgment against the defendant.

The litigation strategy was not cheap. According to the Monitor's Supplement issued today, Crystallex owes the Debtor-in-Possession subsidiary of hedge fund Tenor Capital $111,312,397.75 (interest included) as of September 30, 2017. In addition to the $111 million, Tenor stands to get between 60-80% of the ICSID award, leaving U.S. and Canadian shareholders the real loser in the dispute.


On March 25, 2017, the Federal Court in Washington, D.C. upheld and registered the $1.4 billion award against Venezuela.

"Because none of Venezuela’s arguments suffice to vacate or modify the award under the New York Convention, the Court grants Crystallex’s petition to confirm the award and denies Venezuela’s motion to vacate," concluded U.S. Federal District Court Judge Rudolph Contreras, dismissing Venezuela's objections.

Hughes Hubbard & Reed led the successful legal team on behalf of Crystallex for the registration and verification of the award. Foley Hoag led Venezuela's defense team. Crystallex has also had the award upheld and registered in Canada.


Crystallex was already suing Venezuela's PDVSA, PDV Holding and Citgo in U.S. Federal District Court in Delaware for the "fraudulent transfer" of billions of dollars of Citgo assets out of the U.S. Russia's state owned oil giant Rosneft has now also been named a defendant in that suit after an investigation by the Latin American Herald Tribune uncovered that Venezuela had mortgaged 49.9% of Citgo to Rosneft in exchange for a $1.5 billion loan. That innovative lawsuit, led by Gibson, Dunn and Crutcher, is ongoing, and parts of it are already in the Federal Court of Appeals.

The World Bank ICSID Judgment

In April of 2014, the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) had awarded the mining company Crystallex $1.202 Billion plus interest due to Venezuela’s unfair and inequitable treatment and unlawful expropriation of Crystallex’s investment in the Las Cristinas mining project in Venezuela.

Crystallex had filed its arbitration before ICSID on February 16, 2011, arguing that Venezuela had violated a Treaty between Canada and Venezuela for the "Promotion and Protection of Investments."

The ICSID Award upheld Crystallex’s claims that Venezuela breached Articles II(2) and VII(1) of the Treaty by failing to accord Crystallex’s investments in Venezuela fair and equitable treatment and by unlawfully expropriating those investments.

As a result of these breaches, ICSID ordered Venezuela to pay damages then amounting to $1.386 billion, based on a value for Crystallex’s investment in the Las Cristinas mine of US$1.202 billion on 13 April 2008 – the date when an environmental permit was denied by Venezuela – together with pre- and post-award interest from that date.

Among other things, the Tribunal criticized Venezuela’s Ministry of the Environment for its “arbitrary” and “non-transparent and inconsistent conduct” in connection with its denial of an environmental permit.

The Tribunal stated that it “cannot but conclude that the Permit denial letter and the Romero Report on which the first appears to be based are so fundamentally deficient that, to the eyes of a reasonable third person, they ‘surprise a sense of juridical propriety’….”

Venezuela, the Tribunal concluded, “frustrated Crystallex’s legitimate expectations …, engaged in arbitrary conduct in denying the Permit and rescinding the [Contract it had signed with Crystallex], and committed several acts lacking transparency and consistency.”

The Tribunal therefore found that Venezuela’s “overall conduct vis-à-vis Crystallex, thus violated the [Treaty]standard … and caused all of the investments made by Crystallex to become worthless.”

“On behalf of Crystallex’s board of directors, management, employees and all of its stakeholders, we are pleased that the Tribunal has recognized Venezuela’s unlawful expropriation of the Company’s investment in the Las Cristinas mining project," Crystallex CEO Robert Fung said at the time of the April 2016 judgment. "The company looks forward to collecting on the Award on behalf of all of its stakeholders. We thank our stakeholders for their deep understanding and support throughout this difficult and prolonged process, and our legal team, led by Freshfields’ partner Nigel Blackaby.”

At ICSID, Crystallex was represented by Freshfields Bruckhaus Deringer in Washington, D.C., Travieso Evans Arria Rengel & Paz and Wallis Guerrero in Caracas. Venezuela was represented by Foley Hoag.

Crystallex v PDVSA - US Ct App - Judgment - 3 January 2018 by Latin American Herald Tribune on Scribd

Crystallex v Venezuela - US Ct App - Motion for Postponement - 29 Dec 2017 by Latin American Herald Tribune on Scribd

Crystallex - Monitor Supplement to the Twenty-Second Report - 19 Dec 2017 by Latin American Herald Tribune on Scribd

Crystallex - Letter Re Sealed Report - 11 December 2017 by Latin American Herald Tribune on Scribd

In Re Crystallex - Ontario SC - Crystallex Notice of Motion - 19 Dec 2017 by Latin American Herald Tribune on Scribd

Crystallex - Final Twenty Second Report of the Monitor (Redacted Version) - 23 Nov 2017 by Latin American Herald Tribune on Scribd

In Re Crystallex - Ontario SC - Sworn Affidavit of Harry Near - 21 Nov 2017 by Latin American Herald Tribune on Scribd

In Re Crystallex - Ontario SC - Settlement Approval Order (DRAFT) - 24 November 2017 by Latin American Herald Tribune on Scribd

Crystallex v Venezuela - USDC Del - Cry Motion for Attachment - 14 Aug 2017 by Latin American Herald Tribune on Scribd

Crystallex v Venezuela - USDC Del - Cry Proposed Attachment Order - 14 Aug 2017 by Latin American Herald Tribune on Scribd

Crystallex v Venezuela - USDC Del - Cry Myatt Declaration in Support of Attachment Motion - 14 Aug 2017 by Latin American Herald Tribune on Scribd

Crystallex v Venezuela - USDC DC - Opinion Registering $1.4 Million Judgment against Venezuela - 25 March 2... by Latin American Herald Tribune on Scribd

Crystallex v Venezuela - ICSID - Award for Crystallex ($1.4 billion) - 4 April 2016 by Latin American Herald Tribune on Scribd

Crystallex v PDVSA - USDC Del - Amended Originating Complaint Including Rosneft & GLAS - 4 Jan 2017 by Latin American Herald Tribune on Scribd


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