Law360, New York (June 16, 2017, 7:37 PM EDT) -- A subsidiary of Venezuela’s state-owned oil company urged the Third Circuit on Thursday to cut it from Canadian mining company Crystallex’s suit accusing the oil company of orchestrating transfers to dodge a $1.39 billion arbitration award, saying the transferred property is immune because it belongs to a foreign country. 
Crystallex International Corp. brought the suit in an attempt to collect on the $1.386 billion award, which was issued by a tribunal at the International Centre for Settlement of Investment Disputes in April 2016 following a dispute over a canceled mining project. At issue are $2.8 billion in U.S. assets that were allegedly put out of reach through fraudulent transfers initiated by Venezuela and its oil company, Petroleos de Venezuela SA, or PDVSA.

A Delaware federal judge in September dismissed from the suit Citgo Holding Inc., a U.S.-based subsidiary of PDVSA, but declined to dismiss another subsidiary, PDV Holding Inc. In urging the Third Circuit on Thursday to reverse U.S. District Judge Leonard P. Stark’s decision to keep it as a defendant, PDVH argued that Crystallex’s claim against it under the Delaware Uniform Fraudulent Transfer Act is preempted by the federal Foreign Sovereign Immunities Act.

Specifically, PDVH contended that DUFTA — a state law prohibiting the movement of sovereign property before a judgment is entered against the sovereign entity — impinges on that sovereign’s freedom to exercise control over its property under Section 1606 of the FSIA.

“Crystallex emphasizes the allegedly fraudulent intent undergirding the transfer at issue,” PDVH said. “But whether any of the defendants intended to ‘hinder, delay, or defraud’ Venezuela’s creditors is completely irrelevant to the threshold immunity that cloaks sovereign property under [Section] 1609 and its preemptive effect on state law.”

PDVH added that even if FSIA does not preempt Crystallex’s DUFTA claim in its entirety, DUFTA does not permit the mining company to state a claim against a non-debtor transferor of a debtor’s property.

In 2016, Crystallex, which existed as a company solely to develop a massive gold reserve at Las Cristinas mine in Bolivar state, won a $1.2 billion award from Venezuela plus interest stretching back to when the nation denied Crystallex permits in 2008, despite the company's fulfillment of all requirements. The ICSID determined that Venezuela violated a bilateral investment treaty when it walked back on its 2002 agreement with Crystallex and eventually expropriated the mine in 2009.

When Crystallex moved to have the award affirmed in U.S. federal court, the company said Venezuela had attempted to cash out its assets in Citgo before arbitration concluded. After trying to sell Citgo, PDVSA instead used a mass issuance of junk bonds and a $2.8 billion dividend to the Venezuelan government to move the money to Venezuela, the lawsuit alleged.

Crystallex said the transactions were a blatant, fraudulent effort to shield PDVSA assets from the company and other spurned investors who have initiated dozens of arbitral disputes against the government for a wave of asset seizures and nationalizations of mining and energy projects under now-deceased Venezuelan President Hugo Chávez. Citgo denied that allegation. Crystallex is seeking a judgment returning the $2.8 billion in proceeds to the U.S. or money damages, as well as an injunction against further transfers out of the country.

Judge Stark in early May dismissed PDVSA from the suit, finding the court lacked personal jurisdiction over the South American company.

In a status report submitted to the court later that month, Crystallex said it will ask to file an amended complaint that will allege substantial contacts between PDVSA representatives and the U.S., including trips to the U.S. to instruct Citgo concerning in part the sale and refinancing of billions of dollars to PDVSA.

PDVH earlier this month argued Crystallex’s request to file an amended complaint should be denied or stayed pending the Third Circuit’s review of its appeal. 

Counsel for the parties did not respond Friday to requests for comment.

Crystallex is represented by Robert L. Weigel, Jason W. Myatt and Rahim Moloo of Gibson Dunn & Crutcher LLP, and Raymond J. DiCamillo, Jeffrey L. Moyer and Travis S. Hunter of Richards Layton & Finger PA.

The PDVSA entities are represented by Kenneth J. Nachbar and Alexandra M. Cumings of Morris Nichols Arsht & Tunnell LLP, and Nathan P. Eimer and Lisa S. Meyer of Eimer Stahl LLP.

The district court case is Crystallex International Corp. v. Petróleos de Venezuela SA et al., case number 1:15-cv-01082, in the U.S. District Court for the District of Delaware, and the circuit court case is Crystallex International Corp. v. Petroleos de Venezuela SA et al., case numbers 16-4012 and 17-1439, in the U.S. Court of Appeals for the Third Circuit.