Reverse Fraudulent Transfer Claim: Venezuela and Disputes Over Gold


Gold in Spain

By: Donald L Swanson

Ancient History

Millenia ago, advanced civilizations flourish around the Mediterranean, across east Asia, and in portions of the Western Hemisphere. Mediterranean and east Asia civilizations communicate and trade, back then, across silk roads but remain isolated from the Western Hemisphere.

That isolation continues for a very-long time: until 1492. In the century that followed, Spaniards arrive in the Western Hemisphere, looking for gold, and begin shipping large quantities of gold back home, while Spain’s European enemies turn to pirating such treasures.

The Present

Fast forward to the current millennium, and the relationship between gold and outsiders is still an issue in South America.

–The Problem

Venezuela is said to have the second-highest gold reserves in the world. In 1998, Venezuela and Canada sign an investment treaty. Relying on it, a Canadian gold-producing company, Crystallex International Corp., spends more than $640 million developing Venezuela’s gold resources. But in 2011, Hugo Chavez’s government rejects Crystallex’s efforts, nationalizes all gold production in Venezuela, and expropriates Crystallex’s investments without compensation. This pushes Crystallex into bankruptcy in Canada.

–The Arbitration

Crystallex, in response, brings an arbitration proceeding against Venezuela, as authorized in the treaty, at the World Bank’s International Center for the Settlement of Investment Disputes. The arbitration results in a $1.5 billion award for Crystallex against Venezuela. A U.S. District Court affirms the arbitration award and enters judgment thereon against Venezuela. And Crystallex pursues collection efforts in U.S. Federal courts.

–The Reverse Fraudulent Transfer

Meanwhile, Venezuela insists that the Crystallex judgment will never be paid (according to Crystallex’s Complaint); so it engineers a reverse fraudulent transfer to take assets out of the U.S. and back to Venezuela to avoid creditor claims. Here’s what I mean by a “reverse fraudulent transfer”:

—Fraudulent transfers typically move assets from the debtor to a non-debtor to shield such assets from the debtor’s creditors; but

—Venezuela, instead, moves its non-debtor subsidiary’s assets out of the U.S. and back to itself in Venezuela to shield such assets from its creditors.

The reverse fraudulent transfer details look like this (according to Crystallex’s Complaint):

(i) Venezuela owns a Venezuelan company (it’s alter ego), which owns a second company incorporated in the U.S., which owns Citgo Holding, Inc., also incorporated in the U.S.;

(ii) Citgo Holding has substantial value that might be reached through U.S. courts to satisfy Crystallex’s judgment and claims of other creditors; so

(ii) Venezuela causes Citgo Holding to borrow money and pay a $2.8 billion dividend to its U.S. owner, which passes the dividend on to its owner in Venezuela, all of which occurs without fair consideration or a legitimate business purpose and leaves Citgo Holding insolvent.

Fraudulent Transfer Lawsuit

In response, Crystallex brings a fraudulent transfer claim in U.S. District Court against Citgo Holdings, its U.S. owner, and the owner’s Venezuelan owner, for a return to the U.S. of the $2.8 billion dividend and satisfaction of Crystallex’s judgment. The Case is Crystallex International Corp. v. Petroleos De Venezuela, S.A., et al., Case No. 15-1082 in the U.S. District Court for the District of Delaware.

–District Court Ruling

Defendants move to dismiss the fraudulent transfer Complaint for failing to state a claim upon which relief can be granted. While the District Court recognizes that the reverse fraudulent transfer claim “strains” the fraudulent transfer law’s “structure,” it denies the motion to dismiss for these reasons:

–A fraudulent transfer includes “every mode, direct or indirect, . . . of disposing of or parting with an asset or an interest in an asset”;

–A transfer to be fraudulent must be made “by a debtor,” and the meaning of the word “by” includes “through the agency or instrumentality of” and “on behalf of”; and

–Although Venezuela is the only “debtor” of Crystallex, none of Venezuela’s subsidiaries qualifies as a “debtor,” and Delaware law “does not lightly disregard the separate legal existence of corporations,” Crystallex’s Complaint does state a claim because:

(i) The dividend transactions are, allegedly, “an extraction of funds orchestrated by and carried-out under the orders from Venezuela”: i.e., “made in every meaningful sense ‘by a debtor’”;

(ii) The dividend transfers “allegedly involve the ultimate extraction” of value “by the ‘debtor’ itself”; and

(iii) Multiple “badges of fraud” are present.

–Third Circuit Majority Opinion

Defendants appeal. On January 3, 2017, a three-judge panel of the Third Circuit Court of Appeals reverses on a 2-1 vote, requiring dismissal. The two-judge majority opinion offers these reasons for reversal:

–None of the fraudulent transfer defendants is directly liable for Crystallex’s judgment against Venezuela and, therefore, do not qualify as a “debtor” under fraudulent transfer laws;

–The judgment “debtor” in this case, Venezuela, received the dividend transfer—it did not divest itself of anything;

–Even if Venezuela, as judgment “debtor,” actually devised the transfer scheme, that would not, in itself, create fraudulent transfer liability for its subsidiaries;

–The District Court’s broad definition of “by a debtor” is rejected as contrary to its plain meaning; and

–The phrase “by a debtor” cannot include either Citgo Holding or its U.S. owner because they aren’t alleged to be alter egos of either Venezuela or its Venezuelan subsidiary.

–Third Circuit Dissent

The Third Circuit dissenting Judge would affirm that Crystallex’s Complaint adequately states a fraudulent transfer claim, because:

–The U.S. owner of Citgo Holding is “a direct participant in the fraudulent transfer”;

–The dividend transactions qualify as a “transfer” of debtor property “by a debtor” under fraudulent transfer laws;

–Fraudulent transfer laws are “firmly grounded in principles of equity” and will not leave a “victim” of “a purposeful and complicated fraud,” such as Crystallex, “without any remedy”; and

–The two-judge majority opinion “does not comport with—but rather is wholly contrary to—the [fraudulent transfer law’s] broad remedial purpose,” and “I am hard-pressed to conceive of a scenario more worthy of a trial court’s invocation of its broad equitable powers” under such laws “than this one.”

–Request for Rehearing

Crystallex has requested, of course, a rehearing by a full Third Circuit panel of judges.  And, since the case applies Delaware state law (which is unclear on the issues in this case), Crystallex’s request to the Third Circuit includes the following:

“At a minimum, this Court should certify a question to the Delaware Supreme Court regarding the proper construction” of the Delaware Uniform Fraudulent Transfer Act.


Thus far, we have two Federal judges (one District and one Circuit) who would let the case go forward and two Federal judges (both Circuit) who would dismiss Crystallex’s fraudulent transfer claims for failure to state a claim.

This should be interesting as the case moves through the appellate process!

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Blog at

Up ↑

%d bloggers like this: