Parties that prevail in arbitration often face a winding road to obtain the money they are owed. This is especially true when the counterparty cannot, or will not, comply with the tribunal's decision and satisfy the award. In these circumstances, judgment holders will frequently try to attach property owned by an alleged alter ego, but this strategy has its own challenges and uncertainties. What the judgment holder needs to prove, and how it must prove it, are opaque tasks without much judicial guidance. This is especially true when the judgment debtor is a foreign sovereign, implicating the Foreign Sovereign Immunities Act (FSIA).

However, the U.S. Court of Appeals for the Third Circuit's 2019 decision in Crystallex International Corporation v. Bolivarian Republic of Venezuela provides some answers. This article briefly describes the facts of Crystallex and explores the practical impact of the Third Circuit decision and more recent decisions. Whether Crystallex will be applied by other circuits remains to be seen. It is surely not the last word on the subject, but it would be wise for any judgment creditor seeking to enforce an award against a sovereign's alter ego to study it carefully.

Background of 'Crystallex'

After the Venezuelan government nationalized a gold mine operated by Crystallex International Corporation, it transferred the mining rights to Petróleos de Venezuela, S.A. (PDVSA), a state-owned oil company. Crystallex filed an arbitration claim against the Venezuelan government, and the tribunal ultimately awarded Crystallex a $1.2 billion judgment, which a D.C. District Court subsequently confirmed.

When Venezuela did not satisfy the judgment, Crystallex attempted to attach assets held by PDVSA in Delaware (specifically shares of its wholly-owned U.S. subsidiary, PDVH, which itself owns Citgo Petroleum Corp.), claiming that PDVSA was an alter ego of the Venezuelan government. Both the Delaware District Court and Third Circuit found that PDVSA was an alter ego and allowed Crystallex to attach the shares to satisfy the judgment.

Burden of Proof

What does a judgment holder need to prove to show that a non-party is an alter ego of a foreign sovereign? Any party seeking to pierce a sovereign's veil carries a heavy burden. See, e.g., First Nat. City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 626 (1983)["Bancec"]. However, a judgment holder can be successful if it proves one of two prongs. The first option has two possibilities; the plaintiff can show that the sovereign exerts such "extensive control" over the non-party as to create a principal-agent relationship or that the sovereign's management of the non-party can be considered "complete domination." Separately, a plaintiff can prove that respecting the corporate form would lead to a "fraud or injustice." Crystallex Int'l Corp. v. Bolivarian Republic of Venezuela, 932 F.3d 126, 140, 143 (3d Cir. 2019).

When analyzing whether an alter ego exists in relation to a foreign government, Crystallex examined factors based on the Supreme Court's analysis in Bancec: (1) the level of economic control the government exerted over the entity; (2) whether the government received the entity's profits; (3) how extensively government officials managed or directed the entity; (4) whether the government was the beneficiary of the entity's conduct; and (5) whether maintaining two separate entities would provide benefits to the foreign state in U.S. courts while avoiding corresponding obligations. The court also noted that the Bancec factors were not a "mechanical formula" and other factors could be considered. Crystallex, 932 F.3d at141.

The Third Circuit provided three other pieces of guidance for a party attempting to pierce the veil of a sovereign:

Judgment holders do not need to demonstrate a connection between its injury and the alleged alter ego. The Third Circuit pointed out that none of the Bancec factors suggest a need for a nexus between the alter ego and the judgment creditor's injury. Requiring such a nexus would, according to the court, potentially write the "extensive control" test out of the analysis.

A principal-agent relationship is not required. The Third Circuit applied an easier standard to the "extensive control" test promulgated by Bancec. The Supreme Court originally mandated a principal-agent relationship. Bancec, 462 U.S. at 629. However, the Third Circuit concluded that subsequent jurisprudence eliminated that requirement, and that plaintiffs may demonstrate sufficient control by showing a principal-agent relationship or, like in Crystallex, by showing that the foreign sovereign asserts "complete domination of the subsidiary." Crystallex, 932 F.3d at 143.

Any considerations held by third parties are irrelevant. PDVSA's bondholders attempted to intervene in Crystallex, arguing that their interests as creditors should also be considered. The Third Circuit rejected this argument for two reasons. First, third-party interests are baked into the challenging standard plaintiffs face when proving alter ego status. A high bar already protects investors from frequently being liable for sovereign debts. Second, the bondholders knew the risks of investing in PDVSA when they purchased their interests. Venezuela's control over the company was extensive, obvious, and stipulated in the bond's offering circular. The bondholders knew what they were getting into.

Lingering Uncertainty

Though the Third Circuit provided guidance to judgment holders about what they do and do not need to prove, Crystallex did not specify the appropriate timeframe that courts should consider when determining alter ego status. On remand, the Delaware District Court noted that an alter ego finding is tied to a specific time period, but did not specifically decide what time period is relevant. Crystallex Int'l Corp. v. PDV Holding Inc., No. 15-CV-1082-LPS, 2019 WL 6785504, at *8, n. 17 (D. Del. Dec. 12, 2019). A future court's resolution of this issue will be critical, as an entity could likely be considered an alter ego of a sovereign during one period, but not another.

Attaching Assets

What does a judgment holder need to prove to attach a specific asset owned by the alter ego of a foreign sovereign? Once a plaintiff proves the existence of an alter ego, it must attach assets to satisfy the judgment. Section 1609 of the FSIA restricts eligible property to assets used for a commercial purpose. In other words, property used when a state is acting as a private player in the market rather than as a general regulator. However, the property does not need to be commercially used at the time of attachment, as any alternative would allow parties to avoid attachment by freezing assets when the judgment is to be executed.

The commercial use requirement is broader than it appears. Property is eligible for attachment if it was used in any commercial manner, whether the owner gained a direct financial benefit. In Crystallex, sanctions prohibited the Venezuelan government from receiving any profits from owning PDVSA, but Venezuela still reaped ownership benefits by making management decisions and appointing new company leadership. The Third Circuit considered those benefits to be sufficient to categorize the PDVSA shares as commercial property.

Enforcing the Award

How can a judgment holder enforce an award against an alter ego of a foreign sovereign? The jurisdictional analysis required when a plaintiff is piercing the veil of a sovereign differs in important ways from that used when piercing the veil of a private corporation. Section 1605(a)(6) of the FSIA provides U.S. courts with personal and subject matter jurisdiction over a sovereign "to confirm an award made pursuant to an arbitration agreement governed by an international treaty." Crystallex Int'l Corp. v. Bolivarian Republic of Venezuela, 244 F. Supp. 3d 100, 109 (D.D.C. 2017) (internal citation omitted). The Supreme Court extended this jurisdiction to a sovereign's alter ego in Rubin v. Islamic Republic of Iran. Crystallex, 932 F.3d at 139 (citing Rubin v. Islamic Republic of Iran, 138 S. Ct. 816, 823 (2018)).

When attempting to pierce a private corporate veil, however, plaintiffs must adequately allege personal and subject matter jurisdiction over whichever entity they are trying to pierce. This is especially relevant to international disputes, where jurisdiction may not be established over a foreign party that is merely registered to do business in the state and has designated a registered agent in the state. Famular v. Whirlpool Corp., No. 16 CV 944 (VB), 2017 WL 2470844, at *5 (S.D.N.Y. June 7, 2017).

While considering jurisdictional issues when executing an award, plaintiffs should also keep in mind novel procedural strategies. Crystallex followed the traditional approach of enforcing an arbitral award under the New York Convention by confirming the award before enforcing it in a separate action. However, the U.S. Court of Appeals for the Second Circuit recently held that plaintiffs do not need to follow this "two-step" approach and can instead simultaneously confirm and execute an award. CBF Industria de Gusa S/A v. AMCI Holdings, Inc., 850 F.3d 58, 72 (2d Cir. 2017). No other circuit courts have weighed in on this issue, but plaintiffs should consider whether it would be useful to take advantage of this new procedural structure.

Conclusion

The Crystallex decision provides the Third Circuit's views on a number of issues that face judgment creditors in sovereign cases. However, it is important to understand the unanswered questions in this area of the law and how enforcement actions against foreign sovereigns differ from traditional alter ego cases.

Oliver J. Armas is a partner at Hogan Lovells, the firm's global head of international arbitration, and a member of the firm's global enforcement team. Dennis H. Tracey, III is a partner at Hogan Lovells, the head of operations of the firm's global litigation practice, and a member of the firm's global enforcement team. Sam Dougherty, a law clerk at the firm, assisted in the preparation of this article.