In a recent Third Circuit opinion, Crystallex Int’l Corp. v. Petróleos de Venez., the court held that the transfer of assets by a foreign subsidiary of a debtor was not a fraudulent transfer under the Delaware Uniform Transfer Act (DUFTA). Nos. 16-4012 & 17-1439, 2018 U.S. App. LEXIS 95 (3d Cir. Jan. 3, 2018). As justification for its ruling, the majority opinion cited DUFTA’s requirement that the transfer be conducted “by a debtor” and well-settled Delaware state law defining subsidiaries as separate legal entities from parent corporations. While the opinion is arguably reasonable in light of a strict reading of Delaware law, a dissent by Circuit Judge Julio M. Fuentes indicates that a more equitable decision would prevent the fraud that will inevitably result from the majority’s holding.
The facts of Crystallex involve the diversion of assets by a parent-debtor through a series of subsidiaries, resulting in the funds being placed in foreign territory, beyond creditor reach. Creditor Crystallex International Corp., a Canadian gold producer, owned the rights to Las Cristinas gold reserve in the Bolivarian Republic of Venezuela. Crystallex invested over $640 million over nearly a decade for mine development. But Venezuela refused to issue the permits required to extract and sell the gold, despite Crystallex’s numerous applications. Venezuela claimed Crystallex stalled progress on the mine, terminated the mining agreement and assumed ownership of Las Cristinas in a 2011 gold mine nationalization effort. Venezuela transferred Crystallex’s interest to the state-owned Petróleos de Venezuela, S.A. (PDVSA), which then sold 40 percent to the Venezuelan Central Bank for $9.5 billion. This seizure resulted in Crystallex’s bankruptcy and its initiation of a World Bank arbitration against Venezuela. During the arbitration, Venezuela constantly advised that it would not pay any award. The arbitrators held that Venezuela breached a bilateral investment treaty with Canada and awarded Crystallex $1.202 billion. The District Court for the District of Columbia confirmed the award under the Federal Arbitration Act.
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