The new arguments before the Second Circuit in the PDVSA 2020 Notes case

Source: The author.

On February 20, 2024, the New York State Court of Appeals decided that the Venezuelan Constitutional Law rules the validity of the PDVSA 2020 Notes, leaving to the Court of Appeals for the Second Circuit the decision about the appeal filed against the 2020 opinion of the Southern District Court of New York, which dismissed the case considering that Venezuelan law was not applicable. 

After the Court of Appeal´s decision, on February 27, 2024, the Second Circuit ordered the parties to file supplemental arguments. On March 19, the plaintiffs and the defendants presented their arguments. The Second Court now has all the elements to rule on the appeal that probably will be granted. 

The plaintiff´s arguments. 

PDVSA, PDVSA Petróleo, and PDV Holding, Inc. argued that based on the Court of Appeal´s decision, the Southern District Court “erred in speculating as to the legal effects of the National Assembly’s sovereign acts. Under the act-of-state doctrine, the lower court was required to give effect to the National Assembly’s resolutions“. Hence, remanding the case to determine the Venezuelan Law is unnecessary, except regarding the creditor´s equitable defenses. 

According to the plaintiffs, the validity issue was already decided, based on the vital considerations of the Court of Appeals and the guidelines of the Second Circuit, that   “should reverse the district court’s determination that the National Assembly’s resolutions had no legal effect on the Exchange”. Because the Venezuelan Law does rule the validity of the notes, the “National Assembly’s rejection of the Exchange Offer is not only relevant to that inquiry on the merits but also implicates the act-of-state doctrine”.  The “district court was not free to speculate as to the legal effects (under Venezuelan law) of the National Assembly’s resolutions“, particularly considering the statement of interest filed by the Republic of Venezuela -dismissed by the District Court. 

As an alternative argument, the plaintiff requested that if the Second Circuit does not reverse the District Court’s refusal to apply the act-of-state doctrine, it “should remand for the court to interpret Venezuelan law in the first instance, with deference to the Republic’s considered position on the meaning of Venezuelan law“. Consequently, they asked that “the district court may reopen the summary judgment record or request supplemental briefing on the applicability of Venezuelan law “.

The defendants´ position. 

MUFG Union Bank and Glas Americas opposed any decision by the Second Circuit other than granting the appeal, vacating the District Court´s opinion, and remanding the case to rule on the validity of the Governing Documents. 

In that sense, the defendants deny any relevance to the act-of-state doctrine, considering that, as the District Court concluded, the September 2016 Resolution “did not declare the 2020 Notes of the Pledge invalid”. The act-of-state doctrine does not require any “departure from ordinary choice-of-law analysis in determining the legal consequences in the United States of a foreign sovereign act”.

Accordingly, the Southern District Court should decide the validity of the issue under Venezuelan law. Although the defendants did not elaborate on the Venezuelan Law arguments, they summarized the reasons why the Governing Documents did not violate the Venezuela Law, considering -among other issues- that under the Venezuelan Supreme Tribunal precedents, “contracts involving PDVSA are not as a matter of law contracts of national public interest requiring National Assembly approval“, particularly considering that PDVSA does not require a prior authorization to issue debt based on the “Organic Law of Financial Administration of the Public Sector”. And, even if the Governing Documents are invalid, the “district court has yet to decide whether the governing documents may be enforceable under a range of other New York legal doctrines“, and “would also be asked to consider whether the notes are nevertheless enforceable under the Venezuelan law doctrines of legality”, and “may well in that circumstance need to address the counterclaims asserted by the trustee and the collateral agent for unjust enrichment, quantum meruit, and breach of warranty”. 

The defendants denied that the indenture and pledge agreements could be declared invalid only regarding the pledge agreement because PDV Holding “is not a Venezuelan entity and did not issue securities, and thus is not subject to Venezuelan law”.

What decision could adopt the Second Circuit?

Both parties agreed that the Second Circuit should grant the appeal, vacate the District Court´s opinion, and remand the case. Therefore, it is safe to conclude that the case will continue for months -or even years. 

What is not clear is the scope of the Second Circuit vacating the opinion. There are at least two possibilities: 

1. As the defendants argued, the Second Circuit could vacate the opinion because Venezuelan Law does apply, but without deciding on the invalidity argument—an issue that the Southern District Court will decide. 

• The Second Circuit could vacate the opinion not only considering that the Venezuelan Law applies but also because the Resolutions passed by the National Assembly should be applied under the act-of-state doctrine, deeming the pledge and collateral invalid under Venezuelan Constitutional Law. That is the position of the plaintiffs. If this option is adopted, the Second Circuit will remand the case, only to decide on the consequences of the invalidity under the New York Law. 

Therefore, the Southern District Court or the Second Circuit will determine the validity issue. In any case, there are two possible ways to consider this issue based on the parties´ arguments:

1. The validity issue could be decided under the act-of-state doctrine, as the plaintiffs argued. Because the Venezuelan Law applies, all the Resolutions passed by the National Assembly should be deemed valid and binding without any possibility of second-guessing. Under those Resolutions, it could be concluded that PDVSA was not duly authorized to issue the 2020 Notes because the pledge over Citgo Holding´s shares in favor of firms not domiciled in Venezuela required the previous authorization of the National Assembly, per Articles 150 and 187.9 of the Venezuelan Constitution. An additional argument in favor of this position is the deference that deserves the statement of opinion filed by the Republic of Venezuela. 

• The second way to tackle the invalidity issue is through an ex-novo analysis of Venezuelan Constitutional Law if—as the defendants argue—the Resolutions of the National Assembly are not covered by the act-of-state doctrine. A U.S. court will be in the unpleasant situation of weighing complex arguments on Venezuelan Constitutional Law. 

As I have explained elsewhere, there are solid arguments not only to apply the act-of-state doctrine but also to consider that, at the moment of the issuance of the 2020 Notes, PDVSA required the prior authorization of the National Assembly to pledge Citgo Holding´s shares, based on the framework of the national public interest contracts derived from Articles 150 and 187.9 of the Constitution.

In summary, the Second Circuit will grant the appeal, vacate the opinion, and remand the case. The main question that remains is which court will rule on the issue of invalidity, the Second Circuit or the Southern District Court. As the Second Circuit anticipated in its judgment dated October 13, 2022, the Court of Appeal´s decision already solved the case, meaning that the Court of Appeals for the Second Court could rule on the invalidity issue, avoiding further delays.