Petroleos De Venez. S.A. v. Mufg Union Bank, N.A.
| Decision Date | 16 October 2020 |
| Docket Number | 19 Civ. 10023 (KPF) |
| Parties | PETROLEOS DE VENEZUELA S.A.; PDVSA Petroleo S.A.; and PDV Holding, Inc., Plaintiffs, v. MUFG UNION BANK, N.A. and GLAS Americas LLC, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Before the Court is a weighty question with a convoluted answer: Can Venezuela's state oil company unburden itself of its contractual obligations, pursuant to a transaction consummated four years ago, by dint of foreign law or sovereign act? The question arises from a bond swap transaction (the "Exchange Offer") that occurred in October 2016. Plaintiff Petróleos de Venezuela, S.A. ("PDVSA"), with the guaranty of Plaintiff PDVSA Petróleo, S.A. ("PDVSA Petróleo"), had previously issued two sets of bonds that were scheduled to come due in April and November of 2017 (the "2017 Notes"), with an aggregate principal amount of $9,150,000,000. However, in the years following the issuance of the 2017 Notes, the Venezuelan oil market had become volatile, and by September 2016 it seemed unlikely that PDVSA would be able to pay the significant obligations that would be due the following year. In an effort to forestall a potential default on the 2017 Notes, PDVSA engineered the Exchange Offer, by which it would swap the 2017 Notes for bonds scheduled to come due in 2020 (the "2020 Notes"). Controversially, the 2020 Notes were secured by a pledge of 50.1% of the equity in CITGO Holding ("CITGO"), which was pledged by PDV Holding, Inc. ("PDVH"), a subsidiary of PDVSA and the parent of CITGO.
The Exchange Offer was subject to much dispute in Venezuela and was condemned by the National Assembly, the legislative organ of the Bolivarian Republic of Venezuela (the "Republic" or "Venezuela"). Nevertheless, the Exchange Offer was approved by the parties to the transaction, and the 2020 Notes were issued, in October 2016. PDVSA paid the first two installments of the principal payments in 2017 and 2018, and made interest payments in 2017, 2018, and the first half of 2019. However, PDVSA failed to make required payments on October 27, 2019, and thus defaulted on its obligations under the 2020 Notes. Under the terms attached to the 2020 Notes, Defendants MUFG Union Bank, N.A. ("MUFG") and GLAS Americas LLC ("GLAS") are thus entitled to seek the sale or purchase of Plaintiffs’ majority stake in CITGO.
PDVSA now seeks to avoid the consequences of its default via a declaratory judgment that the 2020 Notes and the Indenture, Pledge Agreement, and Guaranty attached to them (together, the "Governing Documents") were issued and entered into illegally, and thus were null and void ab initio. Specifically, Plaintiffs argue that the 2020 Notes and the Governing Documents are null and void because they were issued and entered into without the prior approval of the National Assembly, and therefore in violation of certain provisions of the Venezuelan Constitution. Defendants, for their part, ask the Court to find that the 2020 Notes and Governing Documents are valid and enforceable and that Plaintiffs are in default. To this end, Defendants argue that New York law controls any inquiry into the validity of the 2020 Notes and Governing Documents, and that there is no assertion of invalidity or illegality under New York law. Even if Venezuelan law were found to control the inquiry, Defendants argue that the Exchange Offer was valid and legal under Venezuelan law.
The Court must now adjudicate the parties’ competing motions for summary judgment pursuant to Federal Rule of Civil Procedure 56. Additionally, the Court has before it Defendants’ motion to exclude the reports and testimony of David C. Hinman, one of Plaintiffs’ proposed experts. For the reasons that follow, the Court largely grants Defendants’ motion for summary judgment and denies Plaintiffs’ cross-motion. Moreover, the Court grants Defendants’ motion to exclude Mr. Hinman's reports and testimony.
Plaintiffs are three connected corporations. PDVSA is an oil and natural gas company incorporated in Venezuela as a sociedad anónima. (Pl. Opp. 56.1 ¶¶ 3-4). Venezuela is the sole shareholder of PDVSA (id. at ¶ 5), and such 100% ownership is mandated by Article 303 of the 1999 Constitución de la República Bolivariana de Venezuela (hereinafter, the "Venezuelan Constitution") (Def. Opp. 56.1 ¶ 9). As a sociedad anónima , PDVSA generally has the capacity to enter into contracts and is managed by a board of directors and corporate officers, and its employees do not qualify as government employees. (Pl. Opp. 56.1 ¶¶ 7-10). PDVSA is not a part of Venezuela's Centralized Administration, although it is a part of the Decentralized Public Administration. (Id. at ¶ 12).2
PDVSA Petróleo is a sociedad anónima incorporated in Venezuela, and it is a wholly owned subsidiary of PDVSA. (Pl. Opp. 56.1 ¶¶ 13-14). PDVH is also a wholly owned subsidiary of PDVSA, but it is incorporated in Delaware and has its principal place of business in Houston, Texas. (Id. at ¶¶ 15-16). PDVH, in turn, wholly owns CITGO, which is a Delaware corporation based in Houston. (Id. at ¶¶ 20-21). CITGO's subsidiary — CITGO Petroleum — is a refiner and marketer of petroleum products, and it owns and operates three large refineries in the United States. (Id. at ¶¶ 24-25). PDVSA, through PDVH, wholly owns CITGO and has done so since 1990. (Id. at ¶ 26). Although CITGO sits at the center of the instant controversy, it is not itself a party to this action.
MUFG is a U.S. national banking association with offices in New York, New York. (Def. Opp. 56.1 ¶ 19). MUFG is the trustee for the 2020 Notes. (Id. at ¶ 20). GLAS is a limited liability company organized under New York law and with offices in New York, New York. (Pl. Opp. 56.1 ¶ 32). GLAS is the collateral agent for the 2020 Notes. (Id. at ¶ 33).
Much like the government of the United States, the Republic of Venezuela has legislative, executive, and judicial branches. (Bliss Decl., Ex. 4 at 37). Because the parties’ claims for relief rely in part on the powers delegated to those branches by the Venezuelan Constitution, the Court will reproduce relevant provisions of that constitution here. Article 150 of the Venezuelan Constitution provides:
The execution of national public interest contracts shall require the approval of the National Assembly in those cases in which such requirement is determined by law. No municipal, state[,] or national public interest contract shall be executed with foreign States or official entities, or with companies not domiciled in Venezuela, or shall be transferred to any of them without the approval of the National Assembly.
Venezuelan Constitution, art. 150.3 Section 9 of Article 187 of the Constitution provides:
It is the role of the National Assembly to: ... Authorize the National Executive to enter into contracts of national interest, in the cases established by law. Authorize contracts of municipal, state[,] and national public interest, with States or official foreign entities or with companies not domiciled in Venezuela.
Id. , art. 187(9). Section 14 of Article 236 of the Constitution provides: "The following are powers and duties of the President of the Republic: ... To enter into contracts of national interest, subject to this Constitution and applicable laws." Id. , art. 236(14). Finally, Article 335 provides:
The Supreme Court of Justice shall ensure the supremacy and effectiveness of constitutional rules and principles; it will be the ultimate and last interpreter of this Constitution and will ensure its uniform interpretation and application. The interpretations established by the Constitutional Chamber on the content or scope of constitutional rules and principles are binding on the other Chambers of the Supreme Court of Justice and other courts of the Republic.
On April 12, 2007, PDVSA issued $3 billion in aggregate principal amount of notes scheduled to come due in April 2017. (Pl. Opp. 56.1 ¶ 39). On October 29, 2010, and January 18, 2011, PDVSA further issued $6.15 billion in aggregate principal amount of notes scheduled to come due in November 2017. (Id. at ¶ 41). Together, these three issuances constitute the 2017 Notes, and they had an aggregate principal amount of $9.15 billion.
Between the first issuance of the 2017 Notes in April 2007 and 2016, the Moody's, Fitch, and S&P rating services all downgraded PDVSA's credit rating. (Pl. Opp. 56.1 ¶ 54). Specifically, Moody's downgraded its rating of PDVSA during this period from B1, with a stable outlook, to Caa3, with a negative outlook. (Id. at ¶ 55). Over the same period, Fitch downgraded its rating for PDVSA from BB-, with a stable outlook, to CCC, with a negative outlook. (Id. at ¶ 56). And S&P downgraded its rating for PDVSA from BB-, with a stable outlook, to CC, with a negative outlook. (Id. at ¶ 57). One factor cited by the three credit rating agencies in their downward adjustments was declining crude oil prices over that period. (Id. at ¶ 58). As of September 16, 2016, the 2017 Notes had an aggregate outstanding principal balance of $7.1 billion. (Id. at ¶ 64). Moreover, there were interest payments totaling $506 million due at various times in 2017. (Id. at ¶ 65).
At the time of the Exchange Offer in 2016, Nicolás Maduro was recognized as the President of Venezuela. (Pl. Opp. 56.1 ¶ 66). However, in National Assembly elections held in December 2015, a coalition consisting of various opposition parties won control of the National Assembly. (Id. at ¶ 72). On May 26, 2016, the National Assembly passed a resolution (the "May 2016 Resolution"), entitled "Resolution on the Respect of the Inherent and Nontransferable Powers of the National Assembly on Contracts of Public Interest Signed by and...
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