The US Government Mumbles Something in Support of Venezuela

Mark Weidemaier & Mitu Gulati

Judicial outcomes are determined by a variety of factors beyond precedent, statutory text, and other purely legal inputs. One factor, especially in cases involving foreign governments, is the preference of the U.S. government. In the middle of the 20th century, the government’s preferences often were dispositive, because the State Department had final say over whether U.S. courts could exercise jurisdiction over foreign states. The State Department eventually tired of being caught in the middle of  these disputes and Congress passed the buck to the judiciary, which now makes immunity determinations in accordance with the Foreign Sovereign Immunities Act.

Still, U.S. administrations periodically put a thumb on the scale in favor of a foreign state. On occasion, this happens even when relations with the foreign state aren’t especially friendly. Foreign sovereign immunity tends to be reciprocal, and the government worries that an overly assertive approach by U.S. courts will prompt courts in other countries to retaliate by asserting expansive jurisdiction over the United States. Still, what’s happening in the Crystallex litigation is a bit unusual. Until now, U.S. sanctions have been the primary tool by which the government has protected Venezuelan assets in the United States. Thus, the U.S. largely sat idle while the federal judiciary ruled that Venezuela and state-oil company PDVSA were alter egos, such that assets formally belonging to PDVSA could be attached by creditors of the Republic itself. Because of that holding, the District Court in Delaware is currently busy trying to figure out whether and how to conduct an execution sale of PDVSA’s equity in PDV Holding, the ultimate parent company of Citgo. (For more, see here and here).

And then, as Anna Szymanski describes in her piece for Reuters that went up earlier today (here), the U.S. government filed a "statement of interest" in the matter.

The U.S. government's submission is strange for multiple reasons. First, the while the government often takes the side of foreign states, it doesn't do so as a matter of course. So one might imagine this would happen only when there is a strong view in the administration that the court made a significant error that will cause big problems down the road. But the government's submission here is .… lukewarm? Kind of half-hearted? Especially when it is supporting a request for such extraordinary relief. The district judge’s ruling on the alter ego question is final and has survived appeal. The legal standard for setting aside such a ruling is quite strict. And the argument for setting it aside in this case is tenuous. The argument relies on the fact that the United States now recognizes Juan Guaidó and the National Assembly as the representatives of the Venezuelan government, and that the Guaidó team now wields nominal control over PDVSA.

As we’ve discussed here before, this is a tough argument to make. The Maduro government still retains functional control over PDVSA. Plus, why allow a shareholder who has abused the corporate form to “fix” a court’s alter ego ruling by restoring operational independence to the entity? That possibility hardly creates good governance incentives.

Perhaps for these reasons, the U.S. government’s support of PDVSA is tepid at best. The statement of interest argues that the recognition of Juan Guaidó is a change in circumstances that “could justify” setting aside the court’s prior ruling. And the statement of interest makes a half-hearted attempt (in footnote 3) to explain why a change of heart here wouldn’t set a problematic precedent for other cases. But it’s hardly a strong show of support. So it’s especially odd that the statement of interest was filed only a day before the court’s scheduled hearing on the matter, without any explanation for the timing except for an odd footnote noting that the government “sincerely apologizes” to everyone involved.

Our sympathies are with the Guaidó team, and we think the U.S. government should continue to block any sale of the PDV-H shares. But we’re still a bit puzzled by the timing and the tepid show of support. President Trump has reportedly never been a big fan of Guaidó (e.g., here). Maybe that explains it.