(Argus, 14.Jan.2021) — Venezuela inched closer to losing control of its US refining subsidiary Citgo today after a federal judge began crafting a sale process for shares of its controlling company to pay off the country’s international debts.
The court will move forward with the process of selling shares of Citgo’s holding company to satisfy roughly $1.4bn owed to defunct Canadian mining firm Crystallex. US sanctions currently block any execution of the sale, but it was reasonable to move forward as far as sanctions allow instead of forcing Crystallex’s owners to wait indefinitely, chief judge Leonard Stark determined.
“All parties agree that, under current law and policy, a sale of PdVH shares cannot be completed without a specific [US Treasury] license,” Stark wrote. “But all the preparatory steps that can be taken without such a license can, and should, be taken.”
US special representative to Iran and Venezuela Elliott Abrams warned federal judges that the loss of Citgo, or even steps toward such an end, could irreparably damage US interests supporting the Guaido opposition. US attorneys in court offered a much cooler defense, declining to take a position on legal contract disputes and to instead rely on executive branch sanctions blocking any transactions related to Venezuelan assets.
Stark did not take such concerns lightly, he said. But the executive branch could more appropriately manage such considerations through sanctions and the US Treasury department, he said.
“The government has not taken the position that the court is ‘blocked from moving forward’ and, in the court’s view, the time has arrived for the sales process to proceed,” Stark wrote.
Stark will appoint a special master to oversee the sale, including minimum advertising requirements, requiring “substantial” good faith deposits of bidders, and only selling as many shares as needed to satisfy judgments. Venezuela, ConocoPhillips, the US and other parties could decide to add other holders of judgments against the country to the sale. Stark also rejected a proposal that only Venezuelan national oil company PdV could administer the sale, finding that any unique knowledge pertinent to the sale should be obtained and used regardless of PdV’s administration.
Venezuela had every opportunity to pay the judgment, and could still, Stark wrote.
“But, having made Crystallex undertake a decade’s worth of extensive and expensive efforts to collect on its judgment, the court is not going to permit a highly-recalcitrant judgment debtor to conduct its own sales process over the objection of its repeatedly-victorious judgment creditor,” Stark wrote.
Counsel for the parties and the board of directors could not be immediately reached for comment.
Crystallex, now controlled by Tenor Capital Management, has sought compensation for more than a decade for expropriated mining interests in Venezuela. Its legal quest in 2018 pierced the corporate veil that traditionally shields companies from the debts of their sovereign owners by convincing the court that Citgo was an alter ego of the Venezuelan government.
Its fortunes have since become intertwined with the struggling opposition government recognized by President Donald Trump’s administration in 2019. That movement, led by National Assembly leader Juan Guaido, lost momentum after initial international recognition. The US-recognized opposition appointed leadership of Citgo, but it exerted little control of institutions inside Venezuela. Guaido lost control of the National Assembly in disputed December elections, and lost explicit recognition as the head of Venezuela from multiple foreign governments. US protections will extend into the administration of president-elect Joe Biden. The transition government did not return a request for comment on how it viewed Venezuelan ownership of Citgo or its plans for the sanctions.
Droves of bondholders have sought judgments in New York federal courts confirming defaults associated with more than $36bn loaned to Venezuela over more than 20 years. Interest is already accruing on more than $358mn in defaulted payments confirmed by US courts. All of that went into arrears in 2017 under President Nicolas Maduro in the wake of financial sanctions the US imposed in August 2017.
A federal court last year denied efforts by the US-backed opposition to have debts on a $3.4bn bond swap declared invalid. Venezuela appealed that decision in December.
By Elliott Blackburn