Lawsuit Alleging Billion Dollar Bribery Scheme Should Be Dismissed Because Assignment By Venezuela Oil Company Violated Champerty Law, Says Judge

Lawsuit Alleging Billion Dollar Bribery Scheme Should Be Dismissed Because Assignment By Venezuela Oil Company Violated Champerty Law, Says Judge

A federal magistrate judge has recommended dismissing a lawsuit filed by a trust company created by Venezuela’s state-run oil company to sue other oil companies over an alleged multi-billion dollar bid-rigging and bribery scheme because, among other things, the assignment to the trust was champertous.

U.S. Magistrate Judge Alicia M. Otazo-Reyes concluded that the trust “lacks standing to pursue this action as the purported assignee of claims belonging to PDVSA” – Venezuela’s state-run oil company – and she therefore recommends that the defendants’ motion to dismiss be granted.

In PDVSA U.S. Litigation Trust v. Lukoil Pan Ams., LLC, Case No. 1:18-CIV-20818-GAYLES/OTAZO-REYES, 2018 U.S. Dist. LEXIS 189801 (S.D. Fla. Nov. 5, 2018), Judge Otazo-Reyes said that in its complaint, filed in March, 2018, the trust alleged that the defendants “engaged in a conspiracy to: ‘fix prices, rig bids, and eliminate competition in the purchase and sale of crude oil and hydrocarbon products by PDVSA; misappropriate PDVSA proprietary data and intellectual property; and systematically loot PDVSA by causing corrupt PDVSA officials not to collect monies due PDVSA, to pay inflated prices for products and services acquired by PDVSA, to accept artificially low prices for products sold by PDVSA, to overlook the failure to deliver products and services paid for by PDVSA, and to fraudulently conceal what was owed to PDVSA.'”  The magistrate judge also said that the “Plaintiff PDVSA US Litigation Trust” alleged that it “is a trust established pursuant to the laws of New York to investigate and pursue claims against Defendants and others.”

In concluding that the trust lacked standing, Judge Otazo-Reyes first noted that the “[t]he Trust Agreement upon which Plaintiff relies to establish its Article III standing” was inadmissible because signatories of the trust did not appear during discovery to authenticate signatures, establish authority to sign, or demonstrate that they understood it.

Addressing the champerty issue, Judge Otazo-Reyes said that New York law applied to the assignment.  Under New York law, she said, the assignment was champertous.  Wrote Judge Otazo-Reyes:

Defendants argue that PDVSA’s assignment of its claims to the Trust is void because such assignment violates New York’s ban on champerty.  New York law provides that

no corporation or association, directly or indirectly, itself or by or through its officers, agents or employees, shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon…

N.Y Jud. Law § 489(1).  According to the Court of Appeals of New York, ‘the statute prohibits the purchase of notes, securities, or other instruments or claims with the intent and for the primary purpose of bringing a lawsuit.’  Justinian Capital SPC v. WestLB AG, 65 N.E.3d 1253, 1254 (N.Y. 2016). . . .

Here, the terms of the Trust Agreement and the results of standing discovery reveal that the Trust’s purpose is ‘to facilitate the prosecution of claims PDVSA has against various entities and individuals and the distribution of the Proceeds thereof.’ . . . .  Further, an Engagement Letter prescribes the procedure for the distribution of the Proceeds. . . .

* * *

With regard to New York law, Plaintiff first argues that the Trust does not fall within the scope of N.Y Jud. Law § 489(1)because it is not technically a ‘corporation’ or an ‘association,’ which are the two entities listed in the statute.  However, Plaintiff does not provide any authority for such a literal reading of the statute.  Plaintiff further argues that, notwithstanding the explicit language of the Trust Agreement, the Trust does not have as its sole purpose bringing litigation.  Plaintiff claims that other purposes of the Trust are to pursue pre-suit settlement, to cooperate with law enforcement agencies, to engage investigators, and to hold and dispose of assets.  However, these activities are all predicated on the Trust’s pursuit of PDVSA’s claims through litigation, as it has done here.  Plaintiff further argues that N.Y Jud. Law § 489(1) does not apply because PDVSA is both the assignor and the sole beneficiary of the Trust.  However, PDVSA’s position is no different than that of the assignor in Justinian, where the Court of Appeals of New York applied N.Y Jud. Law § 489(1). . . .  Finally, Plaintiff argues that it is eligible for the safe harbor provision in N.Y Jud. Law § 489(2) because the value of the work expended before the assignment exceeds $500,000.   However, the safe harbor only applies if the assignee pays a purchase price for the assigned claims that exceeds $500,000 or had a bona fide obligation to pay such purchase price independently of the outcome of the lawsuit. . . .  Here, there is no evidence of any payment by the Trust to PDVSA and no commitment to make any payment other than the distribution of the Proceeds from the prosecution of PDVSA’s claims. . . .  Therefore, the Trust does not qualify for N.Y Jud. Law § 489(2)’s safe harbor provision.

Accordingly, Judge Otazo-Reyes concluded that “PDVSA’s assignment of its claims to the Trust violates N.Y. Jud. Law § 489(1).”

For an article on the filing of the lawsuit earlier this year, see this U.S. News & World Report article, U.S. Lawsuit: Venezuela Cheated of Billions by Rigged Oil Bidshere.

For an article on the opinion from Judge Otazo-Reyes recommending dismissal, see this Law360 article, Fla. Judge Recommends Tossing Venezuela Bribery Suit, here (subscription required).

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