First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement.
This month we discuss two recent developments: (1) the US Supreme Court's recent denial of Venezuela's petition for certiorari in Crystallex International Corporation v. Bolivarian Republic of Venezuela; and (2) the Supreme Court's decision that the New York Convention does not preclude courts from compelling arbitration with nonsignatories (under certain domestic theories) in GE Energy Power Conversion France v. Outukumpu Stainless USA, LLC.
Update 1: Crystallex International Corporation v. Bolivarian Republic of Venezuela
This month, we return to the long-running dispute between Crystallex International Corporation v. Bolivarian Republic of Venezuela, No. 17-mc-151 (Crystallex Asset Proceeding) to discuss the US Supreme Court's recent denial of Venezuela's petition for certiorari. By way of background, Crystallex won an ICSID award against Venezuela in the amount of $1.2 billion (plus interest). Crystallex converted the ICSID award into a US judgment in the DC District Court and thereafter registered that judgment in the Delaware District Court where Crystallex successfully pierced the veil to reach Venezuela's assets, including PdVSA, Venezuela's national oil company, and the shares it holds in the US oil refining company Citgo. In July 2019, the Third Circuit affirmed the Delaware District Court's order piercing the veil. Crystallex Int'l Corp. v. Bolivarian Republic of Venezuela, 932 F.3d 126 (3d Cir. 2019), cert. denied sub nom. Venezuela v. Crystallex Int'l Corp., No. 19-1049, 2020 WL 2515508 (US May 18, 2020) (Crystallex App. Op.') (We covered the Third Circuit decision in a previous First Tuesday Update.) In reaching its decision, the Third Circuit issued several holdings that make it easier for judgment creditors to pierce the veil in cases against foreign sovereign entities. Venezuela challenged two of these holdings in its certiorari petition, which the Supreme Court denied on May 18. The Delaware District Court has lifted the stay on enforcement in the Crystallex Asset Proceeding but Crystallex (and all creditors of Venezuela) need to consider US sanctions as imposed by the Office of Foreign Assets Control (OFAC) of the US Treasury Department as they continue their enforcement actions.
The Supreme Court's denial of Venezuela's petition may have significant legal and policy implications. On the policy front, Crystallex's attempts to enforce its judgment (as a single creditor) is somewhat in tension with the administration's policy to protect Venezuela’s US assets for the interim government of Venezuela led by President Juan Guaidó. In the near term, the Supreme Court's decision to deny review is likely to incentivize enforcement actions by Venezuela's creditors and encourage creditors of foreign sovereign entities more generally to consider alter-ego claims as part of their enforcement strategies. Whether the Third Circuit decision will lead other circuits to adopt more creditor-friendly or pro-sovereign approaches to veil-piercing claims without further direction from the Supreme Court remains to be seen.
To recap, in April 2016, Crystallex received an ICSID award of US $1.2 billion plus interest against Venezuela. Crystallex successfully confirmed its award as a judgment in the US District Court for the District of Columbia. In October 2016, Crystallex registered its DC judgment in Delaware pursuant to 28 U.S.C. § 1963 and commenced enforcement proceedings. Crystallex sought to attach assets of PdVSA, specifically PdVSA's shares in the US company Citgo Holding, Inc., which owns Citgo Petroleum Corp., a US refining company. Citgo's shares are owned by its Delaware-based parent company, PDV Holding (PDVH), which in turn is wholly owned by PdVSA.
Crystallex alleged that the PDVH shares in Citgo owned by PdVSA were subject to attachment because PdVSA was the alter ego of Venezuela. In August 2018, the Delaware District Court agreed with Crystallex and subsequently issued an order attaching PDVH’s shares. Crystallex Asset Proceeding, 333 F. Supp. 3d 380, 426 (Crystallex Aug. 9 Op.); Crystallex Asset Proceeding, 2018 WL 4026738 (D. Del. Aug. 23, 2018) (Crystallex Aug. 23 Op.). In July 2019, the Third Circuit affirmed the district court's decision. Crystallex App. Op.
Two of the Third Circuit's holdings became the basis for Venezuela's certiorari petition. First, the Third Circuit affirmed that Crystallex was not required to establish an independent basis for subject matter jurisdiction with respect to PdVSA, despite the fact that PdVSA is an agency or instrumentality of Venezuela under the Foreign Sovereign Immunities Act (FSIA) and therefore presumptively immune from suit in US courts. Courts have ancillary jurisdiction to enforce their judgments. Because Crystallex had previously established that Venezuela itself was subject to jurisdiction under the FSIA arbitration exception in the merits action, the Third Circuit held that the district court had ancillary jurisdiction over the enforcement proceeding, including Crystallex's alter-ego claim against PdVSA. In so doing, the court rejected PdVSA's argument that Peacock v. Thomas, 516 US 349 (1996), in which the Supreme Court held that ancillary jurisdiction could not be exercised in a subsequent lawsuit over a person not already liable for the judgment without an independent basis for subject matter jurisdiction, precluded the exercise of ancillary jurisdiction in the FSIA judgment-enforcement context. Crystallex App. Op. at 136-138.
Second, the Third Circuit affirmed that Crystallex was not required to show that PdVSA was extensively controlled by Venezuela and that this control was connected to Crystallex's injury, which is the case under common law in certain jurisdictions. Under the test articulated by the Supreme Court in Bancec, the corporate veil may be pierced where (1) a corporate entity is "extensively controlled" by its owner or (2) where giving effect to the separate instrumentalities "would work fraud or injustice." First Nat. City Bank v. Banco Para El Comercio Exterior de Cuba, 462 US 611, 629 (1983). The Third Circuit held that "Bancec's extensive control prong does not require a nexus between the plaintiff's injury and the instrumentality" in order to disregard an instrumentality's separate status. Crystallex App. Op. at 141.
The Third Circuit concluded that PdVSA was extensively controlled by and therefore the alter ego of Venezuela and that PdVSA's shares in Citgo could be attached under the FSIA commercial activity exception. Crystallex App. Op. at 150. The case was remanded to the district court, which further stayed proceedings pending resolution of Venezuela's certiorari petition.
In its petition, Venezuela challenged (1) that the FSIA must be independently satisfied for jurisdiction and the exercise of ancillary jurisdiction over the alter-ego claim against PdVSA was improper and (2) the interpretation of the "extensive control" prong of Bancec as not requiring any connection between the foreign sovereign's control over its instrumentality and the plaintiff's injuries. Venezuela argued that the district court's reliance on ancillary jurisdiction with respect to PdVSA was "irreconcilable" with the FSIA and Peacock and in conflict with the decisions of other circuits applying that case. Pet. at 2.
In relation to the application of the Bancec "extensive control" prong, Venezuela argued that the Third Circuit's treatment of PdVSA as an alter ego of Venezuela without finding a connection between the control asserted over PdVSA and the injuries suffered by Crystallex "makes instrumentalities of foreign sovereigns subject to suit where similarly situated private parties would not be," in contradiction to the FSIA's requirement that a "nonimmune foreign state or instrumentality generally may be held liable only 'to the same extent as a private individual under like circumstances.'" Id. at 4, quoting 28 U.S.C. 1606.
Venezuela emphasized (as it has in other cases brought by its creditors) the foreign policy implications of allowing certain creditors to collect at the same time that the Guaidó government is seeking to establish an "orderly debt restructuring process." Id. at 3.
In response, Crystallex argued that Crystallex did not seek to shift liability for the judgment on to PdVSA via alter ego theory but rather only to establish ownership over specific assets, therefore there is no tension between the Third Circuit's exercise of ancillary jurisdiction and Peacock. Opp. 14. Crystallex further argued that no circuit —including the Fifth Circuit —has found that extensive control alone is insufficient to pierce the veil under Bancec. Id. at 11.
The Supreme Court's denial of Venezuela's petition leaves the tension between the Third Circuit's decision and Peacock and the correct application of "extensive control" prong of Bancec unresolved. The Court's denial also heightens the tension between the administration's support for the Guaidó government, manifested in part through its use of US sanctions laws to prevent creditors from seizing Venezuelan assets, and the growing pressure from creditors to obtain relief.
In light of these tensions, it is somewhat surprising that the administration opted not to weigh in at the petition stage. Typically, the Court invites the solicitor general to weigh in and has often done so in relation to cases with significant foreign policy implications, including sovereign immunity issues. See, e.g., Opati v. Republic of Sudan, No. 17-1268, 2020 WL 2515440 (US May 18, 2020). The Third Circuit Decision implicates US policy toward Venezuela, including US sanctions, as well as more general issues of comity and the scope of protection for sovereigns under the FSIA. However, in this case, the Court declined Venezuela's request to invite the solicitor general to submit its views on the petition, which may explain the administration’s decision not to file a brief. Although the solicitor general may submit its views sua sponte, it has done so only on rare occasions. It is possible that the Court was divided on whether to request input from the executive branch or had already made up its mind to decline the petition. The silence from the executive branch is consistent with its decision not to weigh in earlier in the proceedings, despite an invitation to do so from the district court, and may reflect the competing policy considerations raised by creditors seeking to collect debts from the Guaidó government.
The denial of Venezuela's petition has removed one obstacle from Crystallex's path, but the road to recovery remains far from clear. There are two primary obstacles remaining.
First, although Crystallex obtained a writ to attach PDVH's shares, it still needs the district court to issue an order for the sale of the shares. Pursuant to Federal Rule of Civil Procedure 69, local procedures govern enforcement of a money judgment. Under Delaware law, a creditor attaches a local corporation's stock shares by serving the writ of attachment on the corporation. 8 Del. C. § 324(a)-(b). The court may then order the sale of the shares so that the sale proceeds can be applied to the judgment. Id. § 324(c)-(d).
Venezuela intends to file a motion to quash the writ or for reconsideration under Federal Rule of Civil Procedure 60(b), apparently on the grounds that PdVSA is no longer the alter ego of Venezuela due to the appointment of President Guaidó and changes made to the boards of directors at PdVSA and PDVH. Although the Third Circuit rejected Venezuela's argument that it should consider changed political circumstances in conducting its Bancec analysis, it left this open as a possibility, stating "[o]n remand, Venezuela may direct to the District Court credible arguments to expand the record with later events." Crystallex, App. Opp. at 144. The district court has also instructed creditors in related cases that "any creditor seeking to place itself in a situation similar to Crystallex will have to prove that PDVSA is and/or was the Republic's alter ego on whatever pertinent and applicable date." See OI European Group, B.V. v. Bolivarian Republic of Venezuela, 19-mc-290, Dkt. 26. The District Court's approach to this issue will have implications for creditors in other cases where Venezuela has raised the evolving political situation as a defense and as a basis to stay proceedings.
The second and perhaps most difficult remaining obstacle to enforcement is that in order to move ahead with selling PdVSA's shares in Citgo, Crystallex needs permission from the Office of Foreign Assets Control (OFAC) of the US Treasury Department due to US sanctions applicable to property owned by Venezuela and PdVSA. Under the current sanctions regime, Crystallex cannot sell Citgo's shares absent a special license from OFAC. Notably, in setting a briefing schedule on the motion to quash/motion for reconsideration and mechanism of the sale, the district court agreed with Crystallex that "[n]o Executive Branch order or regulation prohibits this Court from moving forward in determining how the attached shares will be sold." Crystallex Asset Proceeding, May 22, 2020 Order at 2. We can therefore expect a decision on the procedures for the sale at least (assuming Venezuela's motion to quash and/or reconsideration is denied).
Now that the stay has been lifted on the Crystallex Asset Proceeding, all creditors with claims against Venezuela and PdVSA are under increased pressure to act. Crystallex is not alone in trying to seize PdVSA's shares in Citgo. Rosneft and PdVSA bondholders have intervened in the Crystallex Asset Proceeding and other creditors including ConocoPhilips and OI European Group are pursuing enforcement actions in Delaware. Citgo also serves as collateral for the PdVSA 2020 bonds, which has prompted a suit by PdVSA against bondholders in an effort to protect Citgo. See Petroleos De Venezuela S.A. et al v. MUFG Union Bank, N.A. et al., No. 1:19CV10023 (Oct. 29, 2019). We can expect litigation and enforcement activity relating to Citgo and Venezuela to ramp up within the bounds set by US sanctions over the coming months as interested parties react to this latest twist in the Crystallex saga.
Update 2: GE Energy Power Conversion France v. Outukumpu Stainless USA, LLC
Our second update this month also relates to a case that we have covered previously: GE Energy Power Conversion v. Outokumpu Stainless USA, LLC. GE Energy is a French company that manufactured motors for delivery to respondent Outokumpu Stainless USA, the operator of a steel plant in Alabama. Outokumpu installed the motors in its plant, but they later failed. Outokumpu ultimately sued GE Energy in Alabama state court, at which point GE Energy removed the case and filed a motion to compel arbitration. GE Energy prevailed before the district court. Outokumpu Stainless USA LLC v. Converteam SAS, 2017 WL 401951 (SD Ala., Jan. 30, 2017). However, the 11th Circuit Court of Appeals reversed. Outokumpu Stainless USA, LLC v. Converteam SAS, 902 F. 3d 1316 (2018). The 11th Circuit held that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) allows enforcement of an arbitration agreement only by the parties that actually signed the agreement and since GE Energy was a nonsignatory, it could not compel arbitration. The court also held that allowing GE Energy to rely on state-law equitable estoppel doctrines to enforce the arbitration agreement would conflict with the New York Convention’s signatory requirement, adding to the split among the circuits on that issue.
On June 1, the Supreme Court reversed the 11th Circuit Decision. GE Energy Power Conversion France v. Outukumpu Stainless USA, LLC, No. 18-1048, 590 US ___ (June 1, 2020). The Supreme Court held that the New York Convention does not conflict with domestic equitable estoppel doctrines that permit the enforcement of agreements by nonsignatories. The Court examined the text of the New York Convention and the Federal Arbitration Act (FAA), Chapter 2 of which implements the Convention, and found that there is no conflict between the Convention and the provisions of the FAA explicitly permitting courts to apply state-law doctrines relating to the enforcement of arbitration agreements, "including the question of who is bound by them." Slip. Op. at 4. The Court found the New York Convention is "simply silent on the issue of nonsignatory enforcement" and "nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines." Id. at 6. In her concurrence, Justice Sotomayor emphasized that any domestic nonsignatory doctrines applied by the lower courts must reflect the fundamental principle of consent to arbitrate that underpins the FAA, but noted that in this case, such doctrines may not come into play as "Outokumpu appears to have expressly agreed to arbitrate disputes under the relevant contract with subcontractors like GE Energy." Sotomayor, J., concurring. The Court remanded the case, leaving the lower court to decide the question of whether GE Energy can enforce the arbitration agreement under principles of equitable estoppel.