Key Points

  • The Second Circuit affirmed the district court's partial final judgment that PDVSA's 2016 exchange offer, the 2020 Notes, the indenture, and the pledge of 50.1% of CITGO Holding are valid under Venezuelan law.
  • Relying on the Constitutional Chamber's 2002 Andrés Velásquez decision, the court held that national public interest contracts under Article 150 of the Venezuelan Constitution are those executed by the Republic or its competent organs, not by state-owned enterprises such as PDVSA.
  • The court gave the Republic of Venezuela's amicus views respectful consideration under Animal Science Products but concluded that those views conflict with binding rulings of Venezuela's highest court.
  • The act-of-state doctrine does not apply because the National Assembly resolutions purported to operate on a transaction and property outside Venezuela, including notes deposited in New York and the CITGO Holding stock certificate held in a New York vault.
  • The opinion notes that, at least until November 5, 2026, U.S. sanctions constrain the creditors' ability to execute on any judgment against the CITGO shares without a further license.

A federal appeals court on Tuesday upheld bonds that Venezuela's state-owned oil company issued in 2016 and the pledge of a controlling interest in CITGO that secures them. The court rejected the company's argument that the deal was void because Venezuela's National Assembly never approved it.

A three-judge panel of the U.S. Court of Appeals for the Second Circuit affirmed a summary judgment ruling by U.S. District Judge Failla of the Southern District of New York. Circuit Judge Robinson wrote for the panel, which also included Circuit Judges Nardini and Lee.

The decision preserves the claim of the noteholders' trustee, MUFG Union Bank, N.A., and collateral agent, GLAS Americas LLC, to a 50.1% stake in CITGO Holding, Inc., which owns the U.S. refiner CITGO Petroleum Corporation. The court held that Venezuelan law required no legislative approval for the deal and that the act-of-state doctrine, which bars courts from invalidating certain official acts of foreign sovereigns, does not reach notes and shares held in New York.

Petróleos de Venezuela, S.A., known as PDVSA, offered the swap in September 2016 to holders of unsecured notes due in 2017. Holders of 39.43% of the outstanding principal traded those notes for new notes due in 2020. PDVSA's Delaware subsidiary, PDV Holding, Inc., pledged the CITGO Holding stake as security. PDVSA defaulted in October 2019.

The deal unfolded amid a power struggle between President Nicolás Maduro and an opposition-controlled National Assembly, which in September 2016 "categorically" rejected the CITGO pledge. In October 2019, after the United States had recognized Assembly President Juan Guaidó as interim president, the Assembly declared that the bond indenture violated Article 150 of the Venezuelan Constitution. PDVSA, then governed by a board Guaidó appointed, sued that month with its subsidiaries PDVSA Petróleo, S.A., and PDV Holding to have the deal declared void.

Article 150 requires the Assembly's approval before a "national public interest contract" is executed with foreign states or official entities or with companies not domiciled in Venezuela. The Constitution does not define the term. After the New York Court of Appeals held in 2024, on questions the Second Circuit certified, that Venezuelan law governs the notes' validity, Judge Failla again ruled for the creditors.

Judge Robinson relied chiefly on a 2002 decision of the Constitutional Chamber of Venezuela's Supreme Tribunal of Justice, whose constitutional interpretations bind other Venezuelan courts. That decision, Andrés Velásquez, placed "contracts concluded by the Republic through the competent organs of the National Executive" within the category when they meet further criteria. The parties agreed that PDVSA belongs to the Decentralized Public Administration, which comprises public corporations and state-owned enterprises.

"We are mindful of the risks of assigning too much significance to a single statement in a court decision, especially a translated statement," Judge Robinson wrote. But the panel concluded that the chamber had limited such contracts to those executed by the Republic or its organs, not by state-owned enterprises. "We are persuaded that when the Constitutional Chamber repeatedly used legal terms that exclude the Decentralized Public Administration, it did so advisedly," the judge wrote.

The panel rejected PDVSA's reliance on three later chamber decisions. It called PDVSA's argument under the Hydrocarbons Law, which requires legislative approval for joint ventures involving PDVSA, the companies' "strongest argument" and said it "has some force," but held that the statute did not override Andrés Velásquez.

The court also cited the creditors' expert, who found that PDVSA had never submitted its debt deals to the legislature from 1975 to 2020. "This history is, of course, not dispositive," Judge Robinson wrote. "There may be a qualitative difference between debt transactions generally, and debt transactions expressly secured by a controlling interest in CITGO. That's what makes this an especially challenging case."

The Bolivarian Republic of Venezuela filed a friend-of-the-court brief supporting PDVSA. Under the Supreme Court's 2018 decision in Animal Science Products v. Hebei Welcome Pharmaceutical, federal courts give "respectful consideration" to a foreign government's account of its own law but are not bound by it. Judge Robinson wrote that "the Republic's position is at odds with the rulings of its highest court" and that the Republic "has a steep hill to climb in the face of the Constitutional Chamber's ruling in Andrés Velásquez."

PDVSA argued in the alternative that the Assembly's resolutions were sovereign acts that U.S. courts must accept. The panel assumed that the Assembly was Venezuela's sovereign in 2016 and that the resolutions purported to invalidate the deal. It held that the doctrine still did not apply, because U.S. courts may examine a foreign sovereign's attempt to act on property outside its territory.

"In marked contrast to the sugar on a ship sitting in Cuba, the purported acts of state here do not involve assets sitting within Venezuela," Judge Robinson wrote, distinguishing the Supreme Court's 1964 decision in Banco Nacional de Cuba v. Sabbatino. The notes are deposited with a New York custodian, and the collateral agent holds the CITGO Holding stake as a physical stock certificate in a New York vault.

The opinion noted that, since PDVSA appealed, the United States had arrested and indicted Maduro and recognized the government of former Vice President Delcy Rodríguez. The panel wrote that "we assume without deciding that these more recent events have no bearing on our analysis."

Lawyers for PDVSA and PDVSA Petróleo included Igor V. Timofeyev of Paul Hastings LLP. The creditors were represented by Masha G. Hansford of Davis Polk & Wardwell LLP, and Adeel Mohammadi of Munger, Tolles & Olson LLP represented the Republic.

In a footnote, the panel noted that a federal judge in Delaware has approved a sale of PDV Holding under a plan committing more than $2 billion to extinguish at least two-thirds of the 2020 notes. That approval is on appeal to the Third Circuit.

The affirmance leaves the creditors' partial final judgment in place, but it does not clear the way for an immediate sale of the pledged shares. Under a 2018 executive order, a sale requires a license, and the Treasury Department's Office of Foreign Assets Control has repeatedly postponed the effective date of a license covering the CITGO shares. The court wrote that "at least until November 5, 2026, the Executive Branch has constrained Creditors' ability to execute on any judgment against the CITGO shares without further license."