U.S. manufacturer Dresser-Rand and Venezuela’s state-owned oil company have both submitted post-trial briefs and replies following a September bench trial over a defaulted $150 million promissory note, leaving the court to decide whether U.S. sanctions made it impossible for Petróleos de Venezuela SA to pay its debt.
In a reply filed Friday in New York federal court, Dresser-Rand argued that giving PDVSA an extra 30 days to make its quarterly payment under a 2017 promissory note did not transform the note into a new “new debt” subject to U.S. Office of Foreign Assets Control sanctions, nor did the oil company meet its burden to show that payment was “impossible” due to widespread risk-aversion among banks. Furthermore, said Dresser-Rand, PDVSA’s various arguments as to the illegality and impossibility of payments all fail because the oil company had been paying other creditors during the same time period.
PDVSA, in its reply brief Friday, asked the court for an order discharging its payment obligations until sanctions are lifted. According to the oil company, once Dresser-Strand agreed to a one-month extension on the interest payment, the note was converted into a “new debt,” which rendered the transfer illegal — even though the original promissory note was executed in January 2017, some eight months before the sanctions went into effect. In addition to the illegality of payments under the OFAC, the oil company couldn’t possibly pay Dresser-Strand, it said, because “no bank was willing to process PDVSA’s payments under the note.”
Both parties agree that PDVSA made three attempts to transfer money to Dresser-Rand’s Citibank accounts in 2017 and 2018, and that the payments were rejected due to the bank’s internal risk policies. But Dresser-Rand said it presented alternative methods of payment, such as using a German bank, which PDVSA ignored.
PDVSA insisted that the alternatives were not viable, however, because they would have required amendments to the note agreement that would also render it “new debt.” PDVSA said it that was not “authorized” to release a payment to the German bank because the account was held by Dresser’s parent company, Siemens, and that a second alternative would have required payment in euros, which is not allowed under the current note agreement.
Dresser-Strand’s sanctions compliance expert Stephanie Rice testified in September that the 2017 note was not “new debt” under OFAC guidelines and that the purpose of the sanctions was not to “give the debtor an option to simply decide not to make a timely payment on a valid, untouched-by the-prohibition debt and then claim it was impossible to perform,” the company said in its post-trial brief.
At the time, PDVSA urged the court to disregard Rice’s testimony, saying her memory of undocumented phone calls with OFAC many years earlier “has evolved to support D-R’s litigation theories, regardless of whether or not OFAC actually provided that guidance on the hotline.”
Dresser-Rand replied that Rice’s testimony was “all the more reliable because the guidance she received from OFAC was consistent with what OFAC later published” on its website — namely, that U.S. entities can continue to collect payments from Venezuelan government entities on debts created prior to August 2017, regardless of whether they pay within the agreed-upon time frame.
To allow PDVSA’s argument “would incentivize sanctioned debtors like PDVSA to simply default in paying, and then argue that any agreement by the creditor to accept dilatory payment renders the entire, valid debt prohibited by the sanctions,” Dresser-Rand’s brief said.
Meanwhile, Dresser-Rand took aim at PDVSA’s own expert witness, John Barker, “an attorney who has personally represented PDVSA in other, related matters and whose law firm has represented the government of Venezuela for 35 years,” according to the company’s post-trial brief. Barker’s theories as to why the alternative payment methods were illegal and impossible were nothing more than “red herrings,” and an attempt to justify its actions with a new argument after the fact. “Mr. Barker simply contrived self-serving information that does not exist in the record,” Dresser-Rand told the court.
“Moreover, none of PDVSA’s attempted payments to Dresser-Rand during the relevant time period were rejected by banks on the basis that the payment violated [OFAC sanctions], undermining Mr. Barker’s newfound theory,” the company said.
According to the manufacturer, PDVSA did not fulfill its burden under New York law to show that “no bank” would allow a transfer, either.
“There is no evidence of a trend among banks to reject payments involving PDVSA based on risk appetite, let alone of a global consensus that all banks would have rejected the payment based on their respective risk appetites,” Dresser-Rand said. “The fact is that several banks processed the payment, and others would have done so, too.”
In fact, JP Morgan, China CITIC and Dinosaur Merchant Bank all accepted the transfers as the funds made their way to Citibank, where they eventually failed, according to the reply brief.
In its brief, PDVSA argued that it isn’t required to show that it made “every single possible effort to perform” under the promissory note, because it would have to ask every individual bank in existence whether it would allow a transfer. At trial, PDVSA relied on testimony from Citibank and Deutsche Bank, which showed that the banks’ internal risk policies required them to deny transfers from the sanctioned company.
Counsel for Dresser-Rand did not immediately respond to requests for comment Monday. Counsel for PDVSA declined to comment.
Dresser-Rand is represented by Geoffrey Garrett Young, Jordan W. Siev and Nicole L. Lech of Reed Smith LLP.
PDVSA and PDVSA Petróleo are represented by Richard C. Lorenzo, Dennis H. Tracey III and Matthew Ducharme of Hogan Lovells.
The case is Dresser-Rand Co. v. Petróleos de Venezuela SA et al., case number 1:19-cv-02689, in the U.S. District Court for the Southern District of New York.
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