Crystallex International Corporation, a Canadian mining company, has been embroiled in a six-year battle with the government of Venezuela to recover its investment in a gold mine that was appropriated by the Venezuelan government. In this Special Report, the Debtwire legal analyst team reviews the arbitral decision and related enforcement actions to determine Crystallex’s chances of collecting on a USD 1.2bn arbitration award.
A hollow victory?
Crystallex’s road to recovery has been a bumpy one and involved legal disputes, bureaucratic delays, bankruptcy and questionable transactions on the part of Venezuela. After a five-year arbitration process, Crystallex was awarded USD 1.2bn plus interest from Venezuela. While a victory for Crystallex, it may prove a hollow one unless Crystallex can collect on its award, which has proven challenging, to say the least. Crystallex asserts that Venezuela, through its state-owned oil company, Petròleos de Venezuela, S.A. (PDVSA), has embarked on a scheme to monetize Venezuela’s assets in the US and upstream the proceeds out of the US to Venezuela, meant to judgment-proof Venezuela’s government from creditors like Crystallex. Crystallex has attempted to unwind these transactions in the US courts to preserve the value of the assets but has faced challenges from Venezuela and PDVSA every step of the way. However, Crystallex does not appear to be giving up any time soon and is in the midst of litigation in the US, Canada and elsewhere to seize Venezuelan assets to satisfy the judgment.
So what are Crystallex’s chances of collecting on its judgment?
The road to Las Cristinas is not paved with gold
The disputes between Crystallex and Venezuela revolve around Las Cristinas, which are one of the world’s largest yet un-mined gold reserves located in the southeast portion of Venezuela. Venezuela assigned the right to explore and exploit the gold reserves in Las Cristinas, including the entry into operations agreements with third parties, to Corporaciòn Venezolana de Guayana (CVG), a Venezuelan regional development agency. On 17 September 2002, CVG entered into a Mining Operation Agreement with Crystallex pursuant to which Crystallex acquired the right to develop gold deposits at Las Cristinas. Under the agreement, Crystallex paid an upfront fee of USD 15m to CVG and agreed to assume the development, production and financing costs of the mine, among other things, which have amounted to more than USD 600m.
Before Crystallex was able to actually begin operations at Las Cristinas, it needed various environmental permits from the Venezuelan Ministry of Environment. The permitting process was lengthy and lasted several years, requiring Crystallex to obtain a land occupation permit, submit a feasibility study and submit an environmental impact study. Despite Crystallex’s compliance with the permitting requirements and the Ministry’s own statements that it was going to provide the permits to Crystallex, the Ministry denied Crystallex the permits in April 2008. A few months later the Venezuelan government issued a press release stating that Las Cristinas would be operated by the government. For the next two years, Crystallex continued to fund the costs of the Las Cristinas site while it attempted to resolve the dispute, until the CVG officially terminated the operating agreement on 3 February 2011, the stated reasons being delays in progress on the development and operation of the mine and “for reasons of opportunity and convenience.”
Crystallex then embarked on what has been a multi-year journey to formally resolve the dispute with the government of Venezuela and obtain restitution for its investment. The mechanism for such resolution is set forth in a 1996 bilateral investment treaty between Canada and Venezuela. The treaty provides that the dispute is to be resolved by an international arbitration panel under the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) in Washington, D.C. In accordance with the treaty, Crystallex filed a request for arbitration on 16 February 2011 seeking USD 3.1bn in damages.
The arbitration proceedings before the ICSID panel lasted more than five years during which time Crystallex asserts that the Venezuelan government took several steps to capitalize on its investment in Las Cristinas. In particular, after the commencement of the arbitration in 2011, Venezuela took possession of Las Cristinas and the late Venezuelan President Hugo Chávez nationalized gold production within the country. Crystallex also asserts that Venezuela effectively gifted its interest in Las Cristinas to its wholly-owned national oil company, PDVSA. In 2013, PDVSA sold 40% of its interest in a gold mining company which held, among other things, the right to Las Cristinas to the Central Bank for USD 9.5 bn.
After losing its investment in Las Cristinas, Crystallex was forced to file for bankruptcy in 2011 and obtained an order for protection under the Canadian Companies’ Creditors Arrangement Act in Canada, with concurrent recognition from the United States Bankruptcy Court in Delaware in an ancillary Chapter 15 proceeding. Crystallex obtained permission from the Canadian court to maintain possession of what property it had left and stayed all enforcement or other proceedings against Crystallex as it awaited the resolution of the arbitration and the payment of an award against Venezuela to help pay its creditors. A list of Crystallex’s largest creditors at the time of the bankruptcy filing is below.
Source: Crystallex List of Creditors
To that end, Crystallex obtained DIP financing from Luxembourg Investment Company 31 S.à.r.l. (successor to Tenor Kry Coöperatief U.A. which, in turn, was the assignee of Tenor Special Situation Fund I, LLC, the original lender) to pay Crystallex’s general corporate expenses as well as the costs of pursuing the ICSID arbitration and related litigation (detailed below). In return, 31 S.à.r.l. would receive 35% of the net proceeds of any arbitral award or settlement. The Canadian court approved the litigation funding, finding that it was in Crystallex’s best interests because there could be no meaningful recovery, and no successful restructuring, without financing of the arbitration. The Ontario Court of Appeal later upheld that decision.
The funding proved successful, at least in theory, when in April 2016, the arbitrators awarded Crystallex USD 1.2bn plus interest. The award was confirmed by the District of Columbia District Court on 15 March 2017 in accordance with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been incorporated into United States law through the Federal Arbitration Act. Venezuela appealed the confirmation order and sought to stay execution of the judgment pending resolution of the appeal but without posting a bond which would have stayed the case automatically. The D.C. court denied this request finding that, given Venezuela’s current economic situation, “there is some likelihood that Venezuela will be either unwilling or unable to satisfy the full judgment at the end of this case” and giving credence to Crystallex’s argument that “Venezuela both avoids paying arbitral awards in general, and has attempted to avoid paying this award in particular.” After Venezuela failed to pay the award for more than 60 days, the D.C. court issued an additional order on 9 June 2017 authorizing Crystallex to begin enforcement actions to seize Venezuelan assets in the United States.
Venezuela plays “catch me if you can” with its US assets
Obtaining the right to seize Venezuelan assets in the US to satisfy its judgment, although significant, may not yield a full recovery for Crystallex if the value of those assets is not preserved. Indeed, since the award was entered, and even prior to its entry, Crystallex alleges that Venezuela, through its state-owned oil company, PDVSA (which now holds 60% of the rights to Las Cristinas after selling 40% to the Venezuelan Central Bank for USD 9.5bn), carried out a scheme to monetize Venezuelan assets in the US and transfer the proceeds out of the US to Venezuela, beyond the reach of Crystallex and other creditors. The scheme centers around PDVSA’s most valuable US asset, CITGO Petroleum Corporation. CITGO, which is based in Houston, Texas, owns oil refineries in Lake Charles, Louisiana, Corpus Christi, Texas and Lemont, Illinois and valuable networks of pipelines and fuel-distribution terminals in the eastern U.S. According to a July 2014 bond offering, the value of CITGO was about US 8.1bn (as of the end of 2013).
Crystallex alleges that after attempts to sell CITGO were unsuccessful, PDVSA directed its wholly-owned US subsidiary, PDV Holding, Inc., to have its wholly-owned US subsidiary and CITGO’s parent, CITGO Holding, take on USD 2.8 bn in debt. The proceeds of the debt ultimately made their way to Venezuela through a complicated series of dividends. An organizational structure is below, which is helpful in understanding the transaction.
Source: Crystallex I Complaint
The USD 2.8bn in debt consists of a USD 1.5bn bond issuance and a USD 1.3bn credit agreement. The guarantors of the bonds are three former CITGO subsidiaries which CITGO Holding “purchased” from CITGO for USD 748m, which amount was transferred back to CITGO Holding as a “dividend.” CITGO Holding then took the USD 748m, together with the remaining funds from the debt issuance and paid it as a “dividend” to parent PDV Holding, which then made its own “dividend” to Venezuelan parent PDVSA in the same amount. In November 2015, Crystallex commenced a fraudulent transfer action, referred to as Crystallex I, in Delaware District Court against PDVSA, PDV Holding and CITGO Holding alleging that these transactions left US-based CITGO Holding insolvent and constituted a violation of the Delaware Uniform Fraudulent Transfer Act (DUFTA).
Seemingly undeterred by the pending fraudulent transfer litigation, Crystallex asserts that less than a year after the commencement of Crystallex I, Venezuela, again through PDVSA, orchestrated additional transactions involving a bond swap to further monetize its interest in US-based CITGO and return its value to Venezuela and out of the reach of creditors. Specifically, in October 2016, PDVSA exchanged a prior issuance of USD 2.8bn in bonds maturing in 2017 for USD 3.367bn in new bonds maturing in 2020 without receiving any consideration in return. PDVSA’s US-based subsidiary, PDV Holding, granted the bondholders collateral in the form of a 50.1% lien on its shares in its largest asset, CITGO Holding, again for no consideration. This transfer is the subject of a second fraudulent transfer action that Crystallex brought against PDV Holding in Delaware District Court in October 2016, referred to as Crystallex II.
In January 2017, Crystallex amended its complaint in Crystallex II to add three additional defendants – PDVSA, Glas Americas, LLC and Rosneft Trading S.A. Glas, a provider of debt administration services in the US, is the collateral agent for the bondholders holding the 50.1% lien on PDV Holding’s shares in CITGO Holding. Rosneft, an oil company majority-owned by the Russian government, was subsequently granted a lien on the remaining 49.9% of the shares of CITGO Holding in November 2016 in connection with a new financing arrangement for PDVSA. Crystallex alleges that PDVSA received USD 1.5bn in loan proceeds from Rosneft in exchange for PDV Holding’s shares, whereas PDV Holding received no consideration in return. Crystallex warns that if the lien on CITGO Holding’s shares is foreclosed on, it will destroy the value of PDVSA’s largest US asset.
The viability of the litigation currently depends on the resolution of motions to dismiss that have been filed by the defendants in Crystallex I, which directly impact Crystallex II, and which cases have been consolidated for discovery and pre-trial purposes. In September 2016, Delaware District Court Judge Leonard Stark granted a motion to dismiss CITGO Holding but denied a motion with respect to PDV Holding. Judge Stark found that under the unique circumstances of the case, PDV Holding was an appropriate defendant as it was a non-debtor transferor under the DUFTA, whereas CITGO Holding was not a proper party in the case given that the transfer to CITGO was not a fraudulent transfer under the statute. He also rejected the defendants’ claims that the Foreign Sovereign Immunities Act, which establishes limitations as to whether a foreign sovereign nation such as Venezuela may be sued in US courts, preempts DUFTA.
PDV Holding has appealed the ruling, which is currently before the Third Circuit, arguing on appeal that (i) a non-debtor transferor, i.e., PDV Holding, cannot be held liable under DUFTA; and (ii) the Foreign Sovereign Immunities Act does preempt DUFTA. Oral argument is currently scheduled for 12 September 2017.
In addition to dismissing CITGO Holding from the litigation, in May 2017, Judge Stark granted a motion to dismiss PDVSA based on a lack of personal jurisdiction under the Foreign Sovereign Immunities Act. Judge Stark has allowed Crystallex to amend the complaint in Crystallex II to allege sufficient contacts between PDVSA and the US to subject PDVSA to the court’s jurisdiction, but denied a similar request in Crystallex I until the Third Circuit issues its decision. A ruling by the Third Circuit that the Foreign Sovereign Immunities Act preempts DUFTA will effectively lead to a dismissal of both cases.
ConocoPhillips gets in on the litigation
And Crystallex isn’t the only one with an ax to grind against Venezuela. Four ConocoPhillips entities – ConocoPhillips Petrozuata B.V., Phillips Petroleum Company Venezuela Limited, ConocoPhillips Gulf of Paria B.V. and ConocoPhillips Hamaca B.V. – are also litigating fraudulent transfer claims against the PDVSA defendants in Delaware before Judge Stark based on the same transactions at issue in Crystallex I and II. The ConocoPhillips entities are in the midst of an ICSID arbitration that is reminiscent of Crystallex’s dispute with Venezuela concerning Las Cristinas and involves allegations that in 2007, Venezuela appropriated ConocoPhillips’ oil investments in Venezuela’s Orinoco Oil Belt worth billions of dollars without receiving any compensation in return. In September 2013, the ICSID arbitration panel ruled that Venezuela unlawfully expropriated ConocoPhillips’ investments, which decision was further affirmed by the panel in January 2017, but has not yet made an award on damages. Nevertheless, ConocoPhillips is equally concerned with preserving the value of Venezuela’s US assets as it looks towards potential asset seizures to satisfy such an award. The cases are proceeding on a similar track as Crystallex I and II.
Crystallex attempts to collect its judgment
In tandem with Crystallex and ConocoPhillips’ efforts to preserve the value of Venezuela’s assets in the US, Crystallex is also attempting to seize those assets in order to satisfy its USD 1.2bn award (ConocoPhillips will likely follow suit once a damages award has been entered by the arbitration panel). However, this process is complicated and requires extensive litigation in each jurisdiction in which Venezuela holds assets that Crystallex is seeking to attach. To date, Crystallex has sought recognition and enforcement of the ICSID award, a precursor to bringing an enforcement action under the Foreign Sovereign Immunities Act to seize assets in a particular jurisdiction, in Canada (Ontario), the Southern District of New York and Delaware.
In Canada, on 11 July 2016, the Ontario court entered an order recognizing and enforcing the ICSID award and awarding Crystallex USD 20,000 for its costs in connection with the application. The court-appointed monitor of Crystallex’s Canadian bankruptcy proceeding noted that “Crystallex has continued to take the necessary steps to enforce” the order.
In the Southern District of New York, Crystallex has obtained two orders under the Foreign Sovereign Immunities Act, on 12 July 2017 and 26 July 2017 – to prevent Japanese bank Nomura and Chinese Haitong International from transferring Venezuela-owned securities out of New York accounts, and a third such order on 17 August 2017 for a writ of execution against Venezuela’s interest in funds located at the Bank of New York Mellon.
In Delaware, on 14 August 2017, Crystallex filed a motion seeking a writ of attachment against PDVSA’s shares in PDV Holding. Key to the success of this motion is a finding that PDVSA is the alter ego of Venezuela. PDVSA has sought the court’s permission to intervene in the lawsuit.
In addition to the attachment proceedings in Canada, the Southern District of New York and Delaware, Crystallex’s bankruptcy court monitor has reported that “Crystallex continues to pursue enforcement efforts in other jurisdictions where the actions and resulting attachments on Venezuelan assets has not yet been made public.”
In other words, Crystallex is leaving no stone unturned in its effort to collect on its judgment from Venezuela.
Political and economic considerations impact recovery
Whether Crystallex will actually be able to collect its USD 1.2bn judgment is the bigger question. The possibilities for collection are that: (1) Venezuela voluntarily makes payment to Crystallex for the full amount; (2) the parties reach a settlement for some lesser amount; or (3) Crystallex seizes enough of Venezuela’s assets to fully or partially satisfy its award. With regard to (1), all parties can probably agree that it is unlikely that Venezuela will voluntarily make payment to Crystallex on its USD 1.2bn judgment.
Although the tenor of the pleadings suggests otherwise, a settlement between Crystallex and Venezuela is not off the table. Indeed, the monitor in Canada’s bankruptcy proceeding stated in the Twentieth Monitor’s Report to the court in May 2017 that “Crystallex continues to pursue the possibility of a negotiated settlement with Venezuela pursuant to confidential settlement discussions.” The status of those negotiations is unclear, however, political and economic considerations may impact such a settlement possibility. Venezuela is struggling with low oil prices and massive political upheaval. In addition, Venezuela is the subject of 43 cases before the ICSID, 24 of which are currently pending. This, coupled with what Crystallex calls Venezuela’s “looming insolvency,” which Venezuela claims is greatly exaggerated, leads to the conclusion that a settlement, which would likely be in the hundreds of millions if not billion dollar range, may be unlikely.
Therefore, the final possibility for collection, and what Crystallex is most aggressively pursuing, is a dual-track strategy of (i) preserving the value of Venezuelan assets in the US through fraudulent conveyance litigation in Delaware; and (ii) seizing those and other assets through further litigation in the US, Canada and other jurisdictions in satisfaction of the judgment. Whether this strategy proves successful is dependent on several factors.
First, Crystallex must continue to maintain its funding for the litigation which has proven to be and will likely continue to be very expensive. Second, the Third Circuit may rule that the Foreign Sovereign Immunities Act preempts DUFTA, rendering Crystallex I and II, as well as the parallel ConocoPhillips litigation moot. Third, even if the Third Circuit and Delaware District Court rules in favor of Crystallex and enters an order unwinding the transactions that are the subject of Crystallex I and II or awarding Crystallex further damages, the issue of enforcement of such orders looms large. Thus, the key to recovery for Crystallex appears to be not so much in the courts, but in an enforcement scavenger hunt across the globe.
There are several key dates in the next month to look out for in the pending litigation. Oral argument before the Third Circuit on PDV Holding’s appeal of the denial of its motion to dismiss in Crystallex I is set for 12 September. In addition, PDVSA’s opposition to Crystallex’s motion for a writ of attachment against its shares in PDV Holding is currently due on 27 September, unless PDVSA can secure an extension. An amended complaint in Crystallex II and the ConocoPhillips litigation is also likely to be filed soon.
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Sarah Foss is a former practicing restructuring attorney. Prior to joining Debtwire as a Legal Analyst, Sarah practiced in the New York and Houston offices of Winston & Strawn LLP in the area of business reorganizations, including complex Chapter 11 cases and out-of-court restructurings. She has represented large corporate debtors, creditors’ committees, secured lenders, distressed asset acquirers and investment banks across a broad range of industries.
Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.
 CVG Resolution No. 003-11, 3, 3 February 2011.
 The ICSID is an international arbitration institution that facilitates legal dispute resolution involving international investors from its contracting member states. Because only Venezuela was technically a contracting member state of ICSID at the time, the dispute was resolved pursuant to ICSID’s “Additional Facility” Rules.
 Notably, on 24 January 24,2012, the Government of Venezuela formally denounced the ICSID Convention, triggering its withdrawal from the arbitration forum.
 The Chávez government nationalized several industries within the country as part of its social and economic policies.
 Crystallex I Complaint, ¶¶ 35-37.
 D.C. Court Denial Order, at 3-4.
 Crystallex asserts that CITGO Holding was forced to pay a 12% interest rate on the bonds as they were rated as non-investment grade by all three major rating agencies. Crystallex I Complaint, ¶12.
 Crystallex Int’l Corp. v. Petròleos de Venezuela, S.A., C.A. No. 1:15-cv-01082-LPS (D. Del. Nov. 23, 2015).
 Crystallex Int’l Corp. v. PDV Holding, Inc., C.A. No. 1:16-cv-01007-LPS (D. Del. Oct. 28, 2016).
 This transaction has political implications as well and has drawn criticism from US senators who do not want Russia in a position to own a substantial stake in a US-based energy company. Debtwire previously reported that PDVSA and Rosneft are discussing a change in Rosneft’s collateral in Citgo Holding to avoid the consequences of US sanctions.
 Crystallex II Complaint, ¶48.
 Affidavit of Robert Fung, court-appointed monitor over Crystallex’s Canadian bankruptcy proceeding, ¶18.
 Twentieth Monitor’s Report, dated 24 May 2017, at 24.
 Affidavit of Robert Fung, ¶26.