A transfer by a non-debtor cannot be a fraudulent transfer, according to the majority on a Third Circuit panel interpreting Delaware’s version of the Uniform Fraudulent Transfer Act.
The case arose from Venezuela’s expropriation of mining assets worth billions. The dissenter said he was “hard-pressed to conceive of a scenario more worthy of a trial court’s invocation of equitable powers under the Fraudulent Transfer Act.”
The Venezuelan Expropriation
The government of former Venezuelan President Hugo Chavez expropriated a gold mine belonging to the plaintiff, a Canadian gold producer. Venezuelan government-owned Petroleos de Venezuela SA, or PDVSA, became the owner of the gold mine after expropriation. PDVSA later sold a 40% interest in the mine to the Venezuelan central bank for $9.5 billion.
In the World Bank, the plaintiff won a $1.2 billion arbitration award against Venezuela. The Venezuelan government was the only defendant in the arbitration. A federal district court in Washington confirmed the award.
President Chavez vowed publicly that his government would never pay that award nor others resulting from numerous expropriations. To ensure that the arbitration awards could not be enforced, Venezuela took steps to protect its assets in the U.S.
One of the assets was the Citgo oil refining and marketing business in the U.S. PDVSA was Citgo’s indirect, ultimate owner. The plaintiff could not sue or collect from PDVSA, a foreign sovereign protected by the Foreign Sovereign Immunities Act.
To frustrate the collection of judgments in the U.S., the Citgo holding company sold $2.8 billion in debt. The holding company then made a $2.8 billion dividend to PDVSA to remove the proceeds from the U.S. and put them beyond the reach of judgment creditors. The transaction allegedly left the Citgo operating company insolvent and with a negative shareholders’ equity.
Although unable to sue PDVSA, the plaintiff could sue Citgo’s direct parent, a Delaware holding company. Therefore, the plaintiff sued the Citgo holding company in Delaware district court, alleging that the dividend and the subsequent transfers were fraudulent transfers under state law.
The holding company moved to dismiss the Delaware suit, contending there was no fraudulent transfer claim because it was not a debtor liable to the plaintiff on the arbitration award. Although conceding that the Venezuelan government and its alter ego PDVSA were the only debtors, the district court nonetheless denied the motion, believing that a non-debtor could be liable under the Delaware UFTA.
The district court certified the decision for interlocutory appeal to the Third Circuit.
The Majority Opinion
Reversing in an opinion on Jan. 3, Circuit Judge Marjorie O. Rendell wrote for herself and Circuit Judge Thomas I. Vanaskie, saying that her task was to guess how the Delaware Supreme Court would rule.
Judge Rendell said there are three elements to a fraudulent transfer claim: (1) a transfer, (2) by a debtor, (3) with actual intent to hinder, delay or defraud. She said there was no authority from Delaware’s highest court saying whether a transfer by a non-debtor could sustain an UFTA claim.
Judge Rendell therefore relied on a Delaware Chancery Court decision for the proposition that “transfers by non-debtors are not fraudulent transfers under” the Delaware UFTA. She placed significance on the plaintiff’s failure to allege that the Delaware holding company was liable for the arbitration award. The transfer, she said, was a transfer to a debtor (Venezuela), not a transfer by a debtor.
Making the Delaware company liable, Judge Rendell said, would “undermine a fundamental precept of Delaware corporate law: parent and subsidiary corporations are separate legal entities.” She recounted how the plaintiff alleged that PDVSA was Venezuela’s alter ego but did not contend that the Delaware holding company was an alter ego or provide “any other basis” to pierce the corporate veil.
Judge Rendell also said that Delaware courts have rejected the idea that there can be liability for aiding and abetting a fraudulent transfer. Similarly, she said, Delaware courts permit suits only against debtors, “thereby shielding advisors from liability.”
The Dissent
Circuit Judge Julio M. Fuentes dissented. “[I]t cannot be,” he said, that the UFTA, “which is firmly grounded in principles of equity,” can leave “the victim of a purposeful and complicated fraud . . . without a remedy” for the holding company’s “role in transferring $2.8 billion out of the U.S. to avoid Venezuela’s creditors.”
Beyond notions of equity, Judge Fuentes said that the transactions were indirect transfers that are voidable under UFTA. He also argued that the Chancery Court decision, relied on by the majority, did not hold that only debtors can be liable. That case, he said, dealt with aiding and abetting claims. “[I]t does not appear that the Delaware courts have ever held that non-debtor transferors are immune from liability under the Act.”
Furthermore, Judge Fuentes did not interpret the complaint as alleging aiding and abetting liability. The plaintiff, he said, contended that the Delaware holding company “directly participated in the fraudulent scheme.”
Because the majority and the dissent disagree about Delaware law, perhaps the Third Circuit should certify a question to the Delaware Supreme Court if there is a motion for rehearing. Even so, the case is a good example of how hard cases can make bad law.
Rather than attempting to stretch Delaware law, the plaintiff might have crafted a more creative complaint or, as the majority said, try to show that the holding company is Venezuela’s alter ego.