Overview
First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement.
This month, we return yet again to the long-running dispute between Crystallex International Corporation v. Bolivarian Republic of Venezuela, No. 17-mc-151, D. Del. (Crystallex) to discuss the recent developments that have initiated the process of selling the stock of Citgo—with a sale closing date currently set for July 2024— though there remains some uncertainty if the sale will occur at that time. This case has been, and will continue to be, a precedent-setting case covering an array of judgment-enforcement issues. This includes, among other issues, the interrelationship between international arbitration awards and court judgments; Foreign Sovereign Immunities Act (FSIA) issues; piercing the veil; registering judgments in different federal districts; enforcing federal judgments pursuant to the state procedures in which the federal court sits; the interrelationship (and tension) between secured creditors and judgment-creditors; priority; and last but certainly not least, sanctions and the Office of Foreign Assets Control (OFAC) policy. It is a case worth keeping a close eye on and may have a long-term impact on judgment enforcement issues.
By way of background, Crystallex won an ICSID award against Venezuela in the amount of $1.2 billion (plus interest) in April 2016. Crystallex converted the ICSID award into a US judgment in the DC District Court and thereafter registered that judgment in the Delaware District Court in October 2016, where Crystallex successfully pierced the veil to reach Venezuela's assets in August 2018, including PDVSA, Venezuela’s national oil company, and the shares it holds of PDV Holdings (PDVH), which holds the US oil refining company Citgo. Crystallex executed a writ of attachment on the Citgo shares in August 2018. Since then, nine other creditors holding over $4.4 billion in judgments against PDVSA and Venezuela have received conditional writs of attachment, but have not been able to execute them due to sanctions targeted at the Maduro regime.
We have previously covered in depth the US Supreme Court's June 2020 denial of Venezuela's certiorari petition (link) and the US Court of Appeals for the Third Circuit's August 2019 affirmation of Crystallex’s writ of attachment (link). As we explained in our June 2020 update, the sanctions regime established by OFAC of the US Treasury Department prevented the sale of Citgo's shares absent a special license from OFAC, which posed a separation of powers issue between the executive and judicial branches. The Crystallex Sale Procedures Order from October 2022 instructed the Special Master to "solicit and attempt to gain clarity or guidance" from OFAC.
In April 2023, OFAC provided that guidance to the Special Master, noting that while OFAC "does not necessarily agree with the Court's construction of OFAC’s regulations and authorities," (specifically the holding "that a specific license is not necessary for, and that the current Venezuela sanctions regime does not prohibit, the Prefatory Steps antecedent to the consummation of the Sales Transaction to occur") "nevertheless the United States Government is not seeking to contest that construction in this case and considers the Court to have resolved this issue as to the parties' claims." OFAC then announced it would not take enforcement action against entities participating in the sale, and subsequently issued a license to the Clerk of the Court for the District of Delaware authorizing "the issuance and service of writs of attachment fieri facias granted by the Court to judgment creditors against shares of PDVH. OFAC further explained in its responses to FAQs that "an additional license will be required before any sale is executed. As is standard for OFAC's process before providing a license for the disposition of blocked property, the US government will engage in due diligence about the identity of a potential purchaser and will consider relevant details of the proposed transaction. Before a potential purchaser has been identified, it would be premature to issue any such license or express a definitive view on the issuance of a specific license in a future scenario. OFAC nevertheless intends to implement a favorable licensing policy toward such license applications in connection with the execution of a sale as contemplated in the Sale Procedures Order. As with all OFAC licenses and statements of licensing policy, this licensing policy would be without prejudice to reconsideration if US foreign policy and national security interests materially change. In making these licensing determinations, OFAC is committed to fair and equivalent treatment of potential creditors." See here.
With OFAC's "favorable licensing policy" toward a sale, Judge Stark received extensive briefing and argument from over a dozen interested parties in May and June 2023, then issued two orders in late July. (Crystallex Int'l Corp. v. Bolivarian Republic of Venezuela, No. MC 17-151-LPS, 2023 WL 4561155 (D. Del. July 17, 2023); Crystallex Int'l Corp. v. Bolivarian Republic of Venezuela, No. MC 17-151-LPS, 2023 WL 4826467 (D. Del. July 27, 2023).) These two orders, in conjunction with a July Third Circuit opinion affirming that PDVSA is an alter ego of Venezuela no matter whether the Maduro or Guaidó regime controls (OI Eur. Grp. B.V. v. Bolivarian Republic of Venezuela, No. 23-1647, 2023 WL 4385930 (3d Cir. July 7, 2023)), resolve the issues raised by the parties and set forth the nuanced details of the sale process. Judge Stark held, "there is far greater certainty now that this process may proceed than there has been at any prior point in this lengthy litigation. The sale process will proceed."
Also, in June 2023, another potential barrier to the sale was resolved when Russian oil firm Rosneft Trading S.A. turned over its 49.9% stake in Citgo Holdings, the immediate parent of Citgo (the operating entity and a wholly owned subsidiary of PDVH). Rosneft Trading is a Specially Designated National (SDN) and the existence of its lien and the requirement that its property in the United States be blocked was an unresolved question that hung over any judicial auction. That particular issue is resolved, but questions remain about the other lien holder, the 2020 PDVSA bond holders, which are secured by the majority stake in Citgo. Briefing is ongoing in a New York Court of Appeals case that will determine the validity of the 2020 bond holders' lien.
One threshold question was whether PDVH's physical shares of PDVSA were present in Delaware, and thus subject to seizure by the US Marshal executing writs of attachment, or if they were lost, stolen or destroyed within the meaning of 8 Del. C. §§ 167–68, such that reissuance of a replacement share certificate was necessary. At the hearing, the Venezuela parties (the Republic of Venezuela as represented by the IV National Assembly, PDVSA, and PDVH) implied that the certificate was physically in Caracas under the control of the Maduro regime, and the Special Master asserted that the certificate would need to be physically in Delaware for the sale to close. Thus, in light of the potential implication of a second separation of powers issue if the Delaware District Court directly ordered reissuance of the PDVH share certificate, and in recognition of "the respect owed to a foreign sovereign nation and its instrumentalities, and in the interests of comity between state and federal courts," Judge Stark ordered PDVSA to either produce the share certificate or formally determine it was lost, stolen or destroyed, and request reissuance. PDVSA elected to declare the certificate lost, stolen or destroyed and file an action in the Delaware Court of Chancery seeking an expedited order that PDVH immediately reissue a replacement share certificate. Whether this separate Chancery proceeding will slow down the auction schedule remains to be seen.
A second issue related to the eligibility of non-Crystallex creditors to participate in the sale process as "Additional Judgment Creditors." Judge Stark detailed seven "Steps Leading To Participation In Sale" that will "culminate in the Court-ordered sale of as many shares of PDVH, owned by PDVSA, as is necessary to satisfy whatever amount of judgments will be involved in the sale," ranging from Step 1 ("A creditor proves it is owed some debt by a Venezuela Party") through Step 5 ("The creditor obtains a writ of attachment fieri facias, which may be conditioned on subsequent events") and Step 7 (US Marshals serve "the creditor's writ of attachment, perfecting the writ and attaching the shares of PDVH owned by PDVSA"). Only Crystallex has completed all seven steps, while nine creditors are at Step 5 and several others are in other positions between Steps 2 and 5. Six of those nine creditors had their Delaware cases stayed for some months pending resolution of the Third Circuit appeal; now that the Third Circuit has found in favor of the creditors, Venezuela has indicated it intends to file for a writ of certiorari in the Supreme Court. If the Supreme Court issues a stay, those creditors could be stayed from participating in the sale process—which would frustrate the stated goal of holding a single sale to satisfy all judgments, and therefore potentially delay the sale.
Any creditor wishing to be recognized as an Additional Judgment Creditor must reach at least Step 5 as described above by certain dates. As a threshold matter, even before a potential creditor undertakes the seven steps described in the Court’s most recent order, the original Sale Procedures Order provides that within 21 days after the Preparation Launch Date of July 24, 2023 (i.e., by August 14, 2023), any "holder of a judgment seeking to be an Attached Judgment shall deliver to the Special Master and to counsel for the Venezuela Parties a statement indicating the amount such creditor contends remains outstanding with respect to their Attached Judgment or judgment. Such creditor shall provide reasonably sufficient supporting documentation regarding any alleged outstanding balance and all amounts and assets received by reason of the Attached Judgment or judgment and any other information pertinent to understanding the outstanding balance of the applicable Attached Judgment or judgment." The Launch Date of the Sale Process is October 23, 2023.
Then, by a yet-to-be-determined deadline which is likely to be on or after the Additional Judgment Deadline of November 2, 2023, a creditor must have reached Step 5 as described above and obtained a writ of attachment fieri facias. Finally, by a yet-to-be-determined deadline which is likely to be February 20, 2024, the creditor must have completed the entire process and reached Step 7 as described above and perfected the writ of attachment.
A third issue addressed by the July orders was the priority order in which the writs will be perfected. Delaware has first-in-time, first-in-line priority of recording, but the OFAC sanctions have blocked the execution of any attachments since 2019, and there is thus no obvious way to determine priority among the creditors who currently hold conditional writs of attachment fieri facias, or to determine priority among those creditors and other creditors who have not yet obtained writs of attachment but will do so by the Step 5 Deadline. The parties proposed a variety of methods—including determining priority on the date the creditor registered its judgment in Delaware (Step 3), the date the creditor filed its motion seeking a writ of attachment (Step 4), and the date the creditor obtained a writ of attachment, conditional or otherwise (Step 5)—but the final order will be based on the date an Additional Judgment Creditor moved for a writ of attachment that was eventually issued. This priority approach "rewards creditors who acted diligently by registering their judgments in Delaware near the front of the line and by filing motions for writs of attachment early in the process, provided those motions were ultimately found to have merit." (It also specifically targets a creditor whose first motion for a writ of attachment was denied, dropping them from second to fourth in the priority list.) It is not based on the date a creditor actually reaches Step 5; that approach "would place too much weight on the vagaries of the Court’s docket and the undersigned Judge’s other activities, which no litigant had the ability to impact, no matter how diligently it acted." Where there are ties in priority, judgments will be paid pro rata.
The Tentative Sale Hearing Date is July 15, 2024. Venezuela, as represented by persons appointed or designated by, or whose appointment or designation is retained by, an IV National Assembly Entity, is reportedly in settlement discussions with some of the creditors. Discussions with Maduro or his representatives are not authorized by any OFAC general license. There will undoubtedly be new developments in Crystallex over the next year.
