Reinsurance & Arbitration Focus

The Third Circuit Court of Appeals has again allowed creditors of Venezuela to attach assets belonging to Venezuela’s national oil company to satisfy arbitration awards against Venezuela. The Third Circuit rejected Venezuela’s arguments that it was entitled to sovereign immunity and that changes in Venezuela’s government negated a prior holding that its national oil company was its alter ego.

To make a long story short, Venezuela allegedly breached various contracts with foreign creditors. A number of those creditors initiated arbitration and obtained awards.

One such creditor, Crystallex International Corp., confirmed a $1.2 billion award in the U.S. District Court for the District of Columbia and then moved to attach assets held in the United States by a subsidiary of Petróleos de Venezuela, S.A. (PDVSA), Venezuela’s national oil company, to satisfy its award. The U.S. District Court for the District of Delaware held that PDVSA was Venezuela’s alter ego and allowed the attachment. The Third Circuit affirmed in a 2019 decision.

Six other creditors then invoked Crystallex’s strategy by seeking to attach assets held by PDVSA to satisfy their arbitration awards. Venezuela objected. It claimed that the Foreign Sovereign Immunities Act (FSIA), which generally requires the United States to recognize the sovereign immunity of foreign nations, precluded the creditors’ attempts to satisfy arbitration awards against Venezuela through U.S. courts. Venezuela also claimed that changes in its government since 2019 resulted in PDVSA no longer being Venezuela’s alter ego.

The Third Circuit rejected Venezuela’s arguments. It noted that the FSIA is not absolute, that the FSIA allows U.S. courts to issue writs of attachment to an entity’s nonimmune assets where that entity is the alter ego of a foreign state, and that PDVSA remained Venezuela’s alter ego.

The Third Circuit analyzed the Bancec factors to determine alter ego status: (1) the level of economic control by the government; (2) whether the entity’s profits go to the government; (3) the degree to which government officials manage the entity or otherwise have a hand in its daily affairs; (4) whether the government is the real beneficiary of the entity’s conduct; and (5) whether adherence to separate identities would entitle the foreign state to benefits in U.S. courts while avoiding its obligations.

The Third Circuit noted that Venezuela still “exerts significant economic control over PDVSA,” that all of PDVSA’s profits go to the Venezuelan government, that “Venezuelan officials are vital to management of PDVSA and maintain a strong presence in its daily affairs,” that “PDVSA exists to benefit Venezuela,” and that Venezuela “derives significant benefits from the U.S. judicial system” because “PDVSA enjoys the benefits and protections of United States law.”

OI European Group B.V. v. Bolivarian Republic of Venezuela, Nos. 23-1647, 23-1648, 23-1649, 23-1650, 23-1651, 23-1652, 23-1781 (3d Cir. July 7, 2023).