Venezuela's PDVSA fails to use US sanctions to own advantage in Delaware court

Venezuela's beleaguered oil company PDVSA tried to use US sanctions to its own advantage recently -- a bold move that ultimately failed.

This played out in a US legal dispute over a Canadian gold miner seeking to recoup assets seized by the Venezuelan government.

A US district court judge in Delaware ruled August 9 that PDVSA is essentially an "alter ego" of the Venezuelan government, allowing Canadian miner Crystallex to go after the oil company's shares in profitable US refiner Citgo, even though PDVSA had nothing to do with nationalizing the gold mine.

The victory allows Crystallex to collect on a $1.2 billion judgment against Venezuela that it secured in an earlier US court case -- although whether the miner will ever get anything from Citgo given the droves of other companies demanding repayment from Venezuela remains a huge question mark.

PDVSA's argument about US sanctions came into play when the company argued that its shares of PDV Holding, the parent company of Citgo, are "effectively frozen" by an executive order signed by US President Donald Trump in August 2017 as part of broader sanctions meant to pressure Venezuelan President Nicolas Maduro's regime.

"What the executive order says is you cannot purchase equity from Venezuela in the United States," PDVSA argued in the Crystallex case. "There can't be a buyer in the United States."

Crystallex responded that "selling these shares so that a judgment of a United States court could be satisfied is not what these sanctions are trying to prevent." The miner argued that neither Trump's order nor language from the Treasury Department's Office of Foreign Assets Control change the fact that PDV Holding remains a commercial enterprise and PDVSA continues to use its shares for commercial activity, including naming directors and approving contracts.

"PDVSA can still pledge its PDVH shares to secure its own short-term debt (a commercial use)," Crystallex argued. "Moreover, Crystallex contends that the PDVH shares are equity securities, and OFAC has specifically allowed such dealings in equity, notwithstanding the executive order."

Judge Stark agreed with Crystallex.

"This executive order, directed to dividend payments and purchases of securities, has no impact on PDVSA's ability to carry on the commercial activities based on exercise of shareholder rights," Stark said in his 75-page opinion.

Any Citgo assets sold off to pay the $1.2 billion judgment would not return to Venezuela, meaning the restrictions in the executive order would not apply.

Stark adds that nothing in his ruling is inconsistent with the "letter or spirit" of Trump's May executive order, "which seems intended to deprive Venezuela of certain assets and opportunities, not to prevent legitimate judgment creditors in United States courts to be made whole by Venezuela."

As Crystallex argued in the case: "The idea is that this was, put bluntly, to punish Venezuela, not to punish people who were owed money by Venezuela."

Stark's opinion digs up interesting history from Venezuela's oil sector as he weighs Crystallex's argument that PDVSA should not be considered a distinct entity from the Venezuelan government. Past oil ministers Nelson Martinez, Eulogio del Pino and Rafael Ramirez make cameos, as does PDVSA's Twitter feed.

In building its successful case that PDVSA is not separate and distinct from the Venezuelan government, Crystallex argued that Venezuela:

* Deprives PDVSA of independence from close political control by appointing the board of directors, appointing the country's oil minister as PDVSA's president and director, having the oil ministry and PDVSA share office space * Uses PDVSA property, "including aircraft and tanker trucks, for its own political purposes" * Boasts that "PDVSA is Venezuela" for marketing purposes, including on Twitter * Uses PDVSA to achieve its social and political goals domestically and abroad * Forces PDVSA to provide oil to China, Russia and 17 Caribbean countries at a discount to support Venezuela's foreign policy

PDVSA responded that the assertions by Crystallex "demonstrate nothing more than ordinary shareholder control and government regulation that cannot, as a matter of law, satisfy the required showing that the shareholder exercises complete domination and control over the corporation's day-to-day operations."

But the judge was not persuaded by PDVSA's response, ruling that Crystallex had shown probable cause to overcome the presumption of PDVSA being separate and distinct from the government.

PDVSA is appealing to the 3rd Circuit.

While Crystallex's court victory made a splash among oil industry watchers, the company might not ultimately get a piece of Citgo.

Francisco Monaldi , a Latin American energy policy fellow and lecturer at Rice University's Baker Institute for Public Policy, said Crystallex might have to get in line behind a lot of bond holders and bank creditors with direct claims against Citgo or PDVSA.

"It is going to be a shark fest, and lawyers will make the most of it," Monaldi said.