Cystallex Int'l Corp. v. Petróleos de Venezuela, S.A. et al., 879 F.3d 79 (3d Cir. 2018). As a matter of law, a transfer by a non-debtor cannot be a fraudulent transfer under the Delaware Uniform Fraudulent Transfer Act ("DUFTA").
In 2011, Venezuela nationalized its gold mines and expropriated Crystallex’s rights to Las Cristinas gold reserve. Crystallex began arbitration against Venezuela before the World Bank. The arbitrators found Venezuela breached a bilateral investment treaty with Canada and awarded a $1.202 billion judgment to Crystallex.
Venezuela owns 100% of Petróleos de Venezuela, S.A. (“PDVSA”) and Crystallex alleged that PDVSA is Venezuela’s alter ego. PDVSA in turn owns 100% of PDV Holding, Inc. (“PDVH”), which owns 100% of CITGO Holding, Inc. (“CITGO Holding”). CITGO Holding owns 100% of CITGO Petroleum Corporation (“CITGO Petroleum”). PDVSA is a foreign corporation based in Venezuela. PDVH, CITGO Holding and CITGO Petroleum are Delaware corporations.
Crystallex alleged that Venezuela realized it was facing billions of dollars in liability from a variety of arbitration proceedings that arose from Venezuela’s repeated expropriation of foreign investments. Crystallex further explained that Venezuelan officials stated repeatedly that its government would refuse to pay any award against it and would proactively thwart efforts to enforce any award. Venezuela orchestrated a series of debt offerings and asset transfers among PDVSA, PDVH, CITGO Holding and CITGO Petroleum. Its ultimate aim was to monetize its interests in its largest U.S. based asset, CITGO Petroleum, and repatriate the proceeds. Venezuela utilized its alter ego PDVSA who directed it is wholly owned subsidiary PDVH to direct its wholly-owned subsidiary CITGO Holding to issue $2.8 billion in debt. CITGO Holding transferred the proceeds to its parent, PDVH, as a shareholder dividend. Then, PDVH declared a dividend of the same amount to its parent PDVSA, a Venezuelan corporation and alleged alter ego of Venezuela. Crystallex argued that these transfers allowed $2.8 billion in ‘dividends’ to leave the U.S. and end up in the hands of PDVSA where they could not be reached by Venezuela’s creditors.
Crystallex filed suit against PDVH in the District of Delaware and alleged that PDVH violated DUFTA’s prohibition against fraudulent transfers. PDVH moved to dismiss for failure to state a claim under DUFTA because the allegedly fraudulent transfer was not made by a debtor – not made by Venezuela – as required by DUFTA. The District Court denied PDVH's motion to dismiss for failure to state a claim under DUFTA and PDVH appealed the denial of its motion to dismiss.
The Third Circuit considered whether a transfer by PDVH, a non-debtor, could be a "fraudulent transfer" under DUFTA and held that because a transfer made by a non-debtor could never be a "fradulent transfer" under DUFTA, that Crystallex failed to state a claim against PDVH. In reaching its holding, the Third Circuit had to predict how the Supreme Court of Delaware would answer the issue presented.
Under DUFTA, a transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation… [w]ith actual intent to hinder, delay or defraud any creditor of the debtor. 6 Del. C. § 1304. Transfers by non-debtors are not fraudulent transfers under DUFTA as it has been interpreted by the Delaware Courts.
To withstand a motion to dismiss a claim under DUFTA, Crystallex must successfully plead three things: 1) a transfer, 2) by a debtor, 3) with actual intent to hinder, delay, or defraud a creditor. The meaning of the second element “by a debtor” governs the result of this case. The transfer by a non-debtor PDVH to PSVHA was not a fraudulent transfer under DUFTA. Crystallex never alleged that PDVH was a debtor or liable in any way for the judgment Crystallex obtains against Venezuela. Technically, the complained of transaction was a transfer to the debtor which, by virtue of international law, resulted in the assets being out of reach of creditors. This situation is not covered or contemplated by DUFTA. The Third Circuit relied on case law from the Chancery Court because the Delaware Supreme Court has not yet received the opportunity to consider whether non-debtor transferors can commit fraudulent transfers under DUFTA. “DUFTA only provides for a cause of action by a creditor against debtor-transferors or transferees.” Edgewater Growth Capital Partners v. H.I.G. Capital Inc., 2010 WL 720150, at *2 (Del. Ch. Mar. 3, 2010).
The Third Circuit also declined to read the second element “by a debtor” broadly enough to allow a non-debtor subsidiary transferor to be liable simply because its parent company is a debtor. It emphasized that reading the second element this broadly would undermine a fundamental precept of Delaware corporate law: parent and subsidiary corporations are separate legal entities.
Crystallex also asked the Third Circuit to consider whether a claim under DUFTA can be stated where the debtor orchestrated a scheme whereby a non-debtor transferred assets to the debtor. According to Delaware courts, a DUFTA claim based on a theory of non-principal liability is not recognized. There is no aiding and abetting liability under DUFTA. Edgewater, 2010 WL 720150, at *2. Similarly, a conspiracy cannot be predicated on fraudulent transfer under Delaware law. Quadrant Structured Products Co. v. Vertin, 102 A.3d 155, 203 (Del. Ch. 2014).
On February 5, 50218, the Third Circuit denied Crystallex's petition for rehearing by the panel and the Court en banc.
