Non-Debtor Can’t Commit Fraudulent Transfer, Appeals Court Says

By Daniel Gill

A transfer that was designed to place assets outside of the reach of creditors by sending them to Venezuela was not an avoidable fraudulent transfer, because the transferor was not the debtor, the U.S. Court of Appeals for the Third Circuit ruled.

In a split decision, the Jan. 3 opinion by Judge Marjorie O. Rendell interpreted Delaware law and found that without properly alleging that the transferor is a debtor, the action must fail.

Crystallex International Corp. was a Canadian company owning rights to mine gold in Venezuela. In 2011, Venezuela nationalized its gold mines and expropriated Crystallex’s rights to the mine.

Crystallex won an award of $1.2 billion in an arbitration proceeding against Venezuela before the World Bank.

But Venezuela made clear through public statements, including by former president Hugo Chavez, that it had no intention of ever paying this or similar awards.

Venezuela and its alleged alter ego, Petroleos de Venezuela, caused a series of transfers to occur, to remove assets from the United States and repatriate the funds to Venezuela.

Citgo Petroleum and its holding companies were Delaware corporations. The U.S. holding company was owned by Petroleos, Venezuela’s alleged alter ego.

Citgo liquidated its interest by issuing debt. The $2.8 billion it raised was passed up through the holding companies as “dividends,” the court explained, until ultimately the money was repatriated in Venezuela, which enjoys sovereign immunity from civil actions.

Crystallex alleged that this was a fraudulent transfer, made by a debtor with the intent to hinder and delay creditors.

The Third Circuit found that the transferors here were not in fact debtors, such that a fraudulent transfer claim could not stand. In fact, the court pointed out, the debtors here were the transferees, the recipients of the fraudulent conveyance, not the party making the transfer. That the transferors were ultimately owned by the debtors was of no consequence, the court held.

The court also found that there was no cause of action for aiding and abetting a fraudulent transfer, or for conspiracy.

Judge Julio M. Fuentes dissented, arguing that Delaware’s fraudulent transfer laws couldn’t reasonably be interpreted to allow such an intentionally fraudulent transfer to be free from recovery by creditors. He argued that these were indirect transfers of Petroleos and therefore were recoverable.

Judge Thomas I. Vanaskie joined in the opinion.

Nathan P. Eimer, Chicago, argued on behalf of the Citgo holding company. Crystallex was represented by Robert L. Weigel, New York.

The case is Crystallex Int’l Corp. v. PetróLeos De Venezuela, S.A. , 2018 BL 1031, 3d Cir., No. 17-1439, 1/3/18 .

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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