Venezuela’s state-owned oil company told the Second Circuit that holders of $1.9 billion in defaulted bonds do not have a legitimate claim over its asset Citgo Holding, because the underlying deal was an illegal “Maduro-orchestrated transaction” condemned by the U.S.-recognized opposition government.
According to an ad hoc board of Petróleos de Venezuela SA appointed by Interim President Juan Guaidó, the 2016 bond swap — in which the administration of Nicolás Maduro offered PDVSA’s “foreign crown jewel” Citgo as collateral — was never authorized by the National Assembly, as required under the Venezuelan Constitution.
PDVSA argued the transaction went against the orders of the Venezuelan National Assembly, which in 2016 issued a warning to investors “about the nullity of the contracts that are concluded in contravention of Article 150 of the Constitution,” and then “enacted a resolution categorically rejecting it.”
The board also argued the act-of-state doctrine compels reversal of a district court ruling in favor of the bondholders. According to the reply brief the board filed Monday, when the court granted the bondholders’ claim, it denied the authority of the freely elected Venezuelan National Assembly, which the U.S. recognized as legitimate in 2015.
After PDVSA defaulted in 2019, its ad hoc board immediately filed suit in New York asking the court to declare the transaction illegal and invalid. Bondholders filed a counterclaim, and in October 2020 U.S. District Judge Katherine Polk Failla found that under New York business law, the oil company still owed investors, and the U.S. furthermore had a substantial interest in ensuring certainty for creditors. The contracting and negotiating had taken place in New York, and the bonds and collateral were deposited in New York.
In her order, Judge Failla said she was “deeply troubled” by the hardships faced by the Venezuelan people at the hands of the Maduro administration, but had received no clear statement from the Trump administration as to whether it would be consistent with U.S. policy to recognize the National Assembly’s denunciation of the bonds.
PDVSA filed an appeal with the Second Circuit to challenge Failla’s order.
The case has confounded the U.S. government and its judiciary, as Wall Street interests and the courts run headlong into federal sanctions aimed at crippling Maduro’s administration and helping opposition leader Guaidó to gain power in the country. For now, creditors are still prevented from targeting Citgo.
Counsel for PDVSA declined to comment on the record. Counsel for MUFG Union Bank NA and GLAS Americas LLC did not immediately respond to requests for comment.
PDVSA is represented by Kurt W. Hansson, James R. Bliss, James B. Worthington and Igor Victor Timofeyev of Paul Hastings LLP.
PDV Holding Inc. is represented by Michael J. Gottlieb, Nicholas Reddick, Kyle A. Mathews, Kristin E. Bender and Jeffrey B. Korn of Willkie Farr & Gallagher LLP.
MUFG Union Bank NA and GLAS Americas LLC are collectively represented by Walter Rieman, William
A. Clareman, Jonathan H. Hurwitz, Shane Avidan and Roberto Gonzalez of Paul Weiss Rifkind Wharton & Garrison LLP and Christopher J. Clark, Matthew S. Salerno and Sean H. McMahon of Latham & Watkins LLP.
The case is Petróleos de Venezuela SA et al. v. MUFG Union Bank NA et al., case number 20-3858, in the U.S. Court of Appeals for the Second Circuit.
–Editing by Marygrace Murphy.
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