Third Circuit Dismisses Crystallex's Fraudulent Transfer Claim but Potential Liability Remains for PDVSA

Abstract

On January 3, 2018, the United States Court of Appeals for the Third Circuit dealt a significant blow to Crystallex International Corporation’s long-running effort to recover its $1.2 billion arbitral award and judgment against the Republic of Venezuela for appropriating Crystallex’s rights to the Las Cristinas gold mine. In a 2-1 decision, the Third Circuit — reversing a decision of the Delaware district court that allowed Crystallex to allege a Delaware fraudulent transfer claim against a Delaware corporation wholly owned by the Venezuelan state-owned oil company PDVSA — decided that under Delaware law, a non-debtor transferor cannot be liable for a fraudulent transfer under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”). What does this all mean for holders of Venezuelan debt? For PDVSA’s secured 2020 bondholders, the decision is welcome news, and makes the chances of any of those transactions being unwound and the liens granted to 2020 bondholders set aside even more remote. While Crystallex’s chance at a recovery against PDVSA or its assets remains alive if they are successful in their alter ego claims, PDVSA 2020 bondholders can rest easier after the decision that they will retain their liens and priority to any proceeds from a sale of their collateral ahead of Crystallex or similar claimants even if such claimants successfully pursue their alter ego claims against PDVSA. For other Republic creditors considering a similar strategy as Crystallex, the chances of jumping ahead of the 2020 secured PDVSA bonds or even debt below PDV Holding just got less likely, and with each passing day of litigation, the challenge of collecting any award from the cash-strapped nation only increases.