Third Circuit Upholds Attachment of Venezuelan State-Owned Oil Company Assets

For years now, Venezuela has fought a slowly losing battle to prevent its creditors from indirectly seizing and selling its most important U.S.‑based asset: CITGO. Now the federal Third Circuit Court of Appeals has delivered another blow, while the federal district court in Delaware may soon deliver the coup de grâce.

Canadian gold miner Crystallex International started the trend after Venezuela nationalized its flagship project in the Las Cristinas region in 2011. After obtaining a $1.2 billion award in international arbitration, the company domesticated the award as a federal judgment in Washington, D.C., registered that judgment in Delaware, and then enforced the judgment by obtaining writs of attachment against Petróleos de Venezuela, S.A. (PDVSA), the state‑owned Venezuelan oil giant. PDVSA owns PDV Holding, Inc. (PDVH), which in turn owns CITGO through yet another holding company.

By forcing an auction of PDVSA’s shares in PDVH, then, Crystallex would effectively sell CITGO to satisfy its judgment. Before it could attach those shares, however, Crystallex had to prove that PDVSA was an “alter ego” of Venezuela, and thus liable for its judgment, while sidestepping the considerable protections afforded to both Venezuela and PDVSA under the Foreign Sovereign Immunities Act. Crystallex did just that in 2018, obtaining writs of attachment against PDVSA, which the Third Circuit upheld the next year.

Crystallex blazed a new trail with that strategy.  Numerous additional creditors with billions of dollars in collective judgments against Venezuela have since followed it.  Six of them obtained similar orders for writs of attachment against PDVSA in March of this year, and in an opinion issued July 7, 2023, the Third Circuit has now affirmed those orders.

As in the Crystallex appeal, the key issue was whether PDVSA is the alter ego of Venezuela under the Supreme Court’s Bancec factors: the degree of state economic control of the company; whether the state collects company profits; how closely the state manages the company; whether the state benefits in other ways from the company’s operations; and “equity,” defined by the Third Circuit as whether the state and company benefit from the protections of U.S. law while avoiding their just obligations.

To establish that PDVSA was no longer Venezuela’s alter ego, each pointed to significant changes in PDVSA’s governance and operations since the district court issued its writ in favor of Crystallex in 2018.  Most importantly, the interim government of Juan Guaidó had taken control of PDVSA’s U.S.-based assets in 2019, including PDVH itself, and established an independent ad hoc administrative board to manage PDVSA and its U.S. subsidiaries.  PDVSA and Venezuela argued that, in applying the Bancec factors, the court must focus only on the actions of the Guaidó government and this ad hoc board, not the actions of the Maduro regime within Venezuela itself.

In a fascinating and at times literary opinion, the Third Circuit parsed the distinctions among statehood, sovereignty, and government, reaching the conclusion that the “operative comparator” for its alter ego analysis was the nation of Venezuela itself – that is, both the Guaidó and Maduro governments.

That conclusion was important and possibly determinative.  True, the Guaidó government in many ways still exercises economic and managerial control over PDVSA and the board, but within Venezuela itself the Maduro regime continues to run the company as a virtual fiefdom.  The court itself used more restrained language – “extreme control” – but the reasoning was clear: the regime’s close management of PDVSA and use of its assets for its own purposes weighed heavily in favor of an alter ego finding under Bancec.

Ironically, so did Venezuela’s own immunity defense, which the court viewed as affording it the benefit of U.S. law while denying U.S. jurisdiction to “allow remedies aimed at PDVSA.”  Well, yes – but that is an unavoidable consequence of sovereign immunity under the FSIA, which strikes a difficult balance between the need to protect foreign states from interference and the need to maintain accountability for certain non‑sovereign (typically commercial) acts.

Venezuela and PDVSA have defended themselves throughout these proceedings with considerable grit and guile, but one has to wonder whether the sheer determination of those efforts hurt them before the Third Circuit when it assessed the equities.  Venezuela and PDVSA make a real point when they maintain that this approach to Bancec’s “equity” factor stacks the deck in favor of an alter ego finding in any case where the sovereign resists that very finding.  Perhaps the court was too dismissive of that argument – especially since the remaining Bancec factors provide ample support for its conclusion.

Regardless, these six creditors now join Crystallex as holders of writs of attachment on PDVSA’s shares of PDVH.  The next step in this groundbreaking litigation will occur in the district court in Delaware, where Judge Leonard Stark has said that he expects to decide Venezuela and PDVSA’s latest objections to the attachments and to the court’s procedures for a forced auction of the PDVH shares by the end of July. 

That ruling will either revive Venezuela and PDVSA’s fortunes or bring them close to the end of the line.

If you have any questions or would like to further discuss these developments, please reach out to Natalie Shkolnik at (212) 981-2294, nshkolnik@wilkauslander.com or Michael Van Riper at (212) 421-2902, mvanriper@wilkauslander.com.

About Wilk Auslander

Wilk Auslander is an internationally recognized law firm leader in global judgment enforcement.  By avoiding most of the client conflicts that hamper larger firms, Wilk Auslander’s judgment enforcement team represents both creditors and debtors in high‑stakes cross‑border disputes involving judgments worth hundreds of millions of dollars, including:

• Domesticating foreign judgments and arbitration awards in the United States and recognizing United States judgments and awards overseas.
• Protecting and pursuing foreign sovereign assets with a keen understanding of the pitfalls and advantages of the Foreign Sovereign Immunities Act.
• Coordinating worldwide asset searches and executions in Europe, the Americas, Asia, and offshore havens and banking hubs, using a mix of court procedures and behind‑the‑scenes investigation.
• Defending judgment debtors in proceedings seeking to recognize foreign judgments and protecting debtor assets from execution.