Venezuela is Like... PDVSA's Alter Ego, and Vice Versa?

And so it begins. As Anna notes, Venezuela is in dire straits, yet its stubborn insistence on paying bondholders puts it in the running for "world's slowest train wreck." When the wheels finally leave the tracks, expect a free-for-all in which competing claimants (bondholders, arbitration claimants, etc.) fight to recover as much as possible, both from the government and from state-owned oil company PDVSA. The major players will include creditors holding billions of dollars in arbitration awards against Venezuela. These creditors, unlike those holding government or PDVSA bonds, need not fear a debt restructuring. They will, however, have to find attachable assets that can be seized to satisfy their claims.

Enter Canadian mining company Crystallex, which has been trying to enforce a $1.2 billion arbitration award against Venezuela, so far without success. A few days ago, it tried a new tack--one with broader implications for any restructuring of Venezuela's or PDVSA's debt. Crystallex asked a federal court in Delaware to attach the shares of PDV Holding, Inc., a Delaware company that is the ultimate U.S. parent of CITGO petroleum. PDV Holding is owned by PDVSA, which, in turn, is owned by Venezuela.

Whether Crystallex can seize the shares depends on whether PDVSA (which owns them) can be treated as the alter ego of Venezuela (Crystallex's opponent in the arbitration). If not, Crystallex is out of luck; it can't seize property that doesn't belong to Venezuela. But if PDVSA is Venezuela's alter ego, then not only Crystallex, but potentially any other creditor of Venezuela, can look to the oil company to satisfy the government's debts. The same goes in reverse: Creditors of PDVSA might be able to look to the government to satisfy their claims.  

These questions of "alter ego" liability will play a crucial role in Venezuela's debt crisis. We have discussed this subject multiple times already here on Credit Slips, mostly in connection with proposals to have the government strip PDVSA of its right to exploit hydrocarbon reserves. An even more important question--which I hope to address in another post--is whether PDVSA can structure its operations to sell oil in the United States without having creditors seize the receivables. This question also depends in part on the law of alter ego liability. Yet another question--raised by Crystallex--is whether the government's creditors can seize its indirect stake in CITGO.*  

It's early days in Crystallex's attempt to seize PDVSA's interest in PDV Holding. Crystallex has asked to submit an extra-long brief justifying its request. Here's a copy of the proposed brief, which offers a forceful and relatively complete argument for why PDVSA should be treated as Venezuela's alter ego. In brief: "PDVSA is so extensively controlled by the government that it is impossible to say where one ends and the other begins." To make the point, Crystallex has mined PDVSA's Twitter feed, noting that on at least 100 occasions, PDVSA has tweeted "PDVSA es Venezuela."

I don't know what this proves, except that I should be glad not to have worked at the law firm representing Crystallex. ("Hey Weidemaier, we need you to stay late to count how many times PDVSA has tweeted that it "is" Venezuela!) The doctrine of alter ego liability does ask whether the shareholder (Venezuela) controlled the entity (PDVSA). But in the context of state-controlled entities, this question can be a bit silly. What should matter is whether the government has used the corporate form to defraud creditors or in ways that undermine the Foreign Sovereign Immunities Act. Still, this case is one to watch. If the court holds that PDVSA is Venezuela's alter ego, this will complicate the (inevitable) government and PDVSA debt restructurings.  

* Query why Crystallex values PDV Holding shares. Shareholders can be wiped out in bankruptcy and are last in line behind other creditors, of which CITGO has plenty. On the other hand, seizing the shares might allow Crystallex to disrupt Venezuela's oil pipeline to the United States and would probably force the government to make some hard choices about how to structure its U.S. oil operations.

Comments

[Mitu]

Very nice post. The bit about the associate whose job it was to go through old tweets and count them was quite hilarious. Thanks for making me laugh.

More seriously, I have a question about how the doctrine of alter ego or veil piercing might work in this context. If Crystallex can get at the shares in PDV Holdings, does that mean that it can also get to Citgo's hard assets. I'm assuming not (or at least not without making additional levels of veil piercing arguments), since presumably attaching the hard assets would be more valuable to Crystallex than shares in the company that owns those assets.

[Mark Weidemaier]

Mitu: You're right that Crystallex can attach CITGO assets only by showing that CITGO is an alter ego (or under another theory that gives rights against CITGO). I suppose it could also try to use its position as owner of PDVH to extract value from CITGO, but that would potentially expose it to claims by CITGO's other creditors...

[Sebastian Grund]

Very interesting question indeed. Albeit not directly related to PDVSA, the Second Circuit's case law on BRCA's alter ego comes to my mind reading this... NML Capital, Ltd. v. Banco Central de la República Argentina, 652 F.3d 172 (2d Cir. 2011)

[Anna Gelpern]

Mark's postscript strikes me as exactly right: the longer we stick with the presumption of separateness, the higher the risk of borrowing by US subs for the benefit of the mother ship, which structurally subordinates Crystallex ... except that the entire corporate structure soon starts looking like the sovereign's alter ego ... and the enforcement gambit starts looking like the conventional sovereign game: nuisance value overtakes marketable asset value.