Litigators of the Week: A Reset in the Fight Over $2B in Bonds Issued By Venezuela’s National Oil Company
There are the proverbial bet-the-company cases.
But what happens when the company is one of the “crown jewels” of a country’s national oil industry.
The Litigators of the Week are Igor Timofeyev of Paul Hastings and Michael Gottlieb of Willkie Farr & Gallagher, who represent affiliates of Petróleos de Venezuela S.A., the South American company’s national oil company. The firms have been challenging the validity of nearly $2 billion in bonds issued by PDVSA under the regime of President Nicolás Maduro and against the expressed consent of the country’s National Assembly.
Last week, after the team previously convinced New York’s Court of Appeals that Venezuelan law rather than New York law should govern the validity of the underlying bonds, the Second Circuit vacated a lower court judgment in the case and remanded it for further proceedings.
Lit Daily: Who is your client and what is at stake in this litigation?
Igor Timofeyev: Collectively, we have three clients. Paul Hastings represents the Ad Hoc Board of Petróleos de Venezuela S.A. (PDVSA), Venezuela’s national oil company, and its subsidiary, PDVSA Petróleó S.A. (PPSA). The Ad Hoc Board was appointed by the democratically elected Venezuelan National Assembly, which the United States recognizes as the only legitimate branch of the Venezuelan government. Willkie Farr represents PDV Holding, Inc. (PDVH), a U.S.-based PDVSA subsidiary. PDVH is the parent company of CITGO Holding, which is the sole shareholder of U.S.-based refiner CITGO Petroleum Corporation (CITGO), known as the “foreign crown jewel” of Venezuelan national industry.
Two issues are at stake in this litigation. On a practical level, this case implicates the ownership and control of CITGO. At issue in this lawsuit are bonds that PDVSA, under the control of the illegitimate regime of Nicolás Maduro, issued in 2016, in order to obtain extra time for repayment of previously issued bonds that were coming due. Unlike the prior bonds, which were unsecured, the new bonds (set to mature in 2020) were purportedly secured by a pledge of 50.1% of PDVH’s shares of CITGO Holding stock. We argue that the 2020 bonds were invalid from the outset because they were never authorized by the Venezuelan National Assembly, as is required under the Venezuelan Constitution for this type of contracts, which affect Venezuela’s national public interest. The National Assembly not only withheld its authorization, but passed a resolution “categorically rejecting” the proposed pledge of CITGO’s ownership. The Maduro regime nevertheless went ahead and issued the bonds.
At a more fundamental level, this case is about the rule of law in Venezuela, and that country’s prospects for a financially secure democratic future. The Venezuelan constitution is clear that contracts of national public interest, such as those that would pledge Venezuela’s ownership of its critical national asset, must be approved by the National Assembly. The authoritarian Maduro regime disregarded those constitutional restrictions, and forced PDVSA to offer CITGO as a collateral to extend the regime’s financial lifeline. This case is therefore not just about money, it implicates the National Assembly’s constitutional prerogatives, and the viability of its efforts to preserve this critical national asset for the Venezuelan people. The stakes really could not be higher. As the U.S. government stated earlier in the case, the loss of CITGO “would be greatly damaging and perhaps beyond recuperation” for both the National Assembly-led government and for the U.S. foreign policy interests in Venezuela.
How did this matter come to you and your firms?
Timofeyev: After the National Assembly-led government formed the Ad Hoc Board of PDVSA, Paul Hastings’ Latin America practice group and Kurt Hansson, co-chair of our complex litigation and arbitration practice, had the opportunity to meet with the Ad Hoc Board and discuss this potential case. We were excited at the opportunity to represent the Ad Hoc Board in this challenging case—both because of the cutting-edge legal issues it present but also, and more importantly, because of its importance to the people of Venezuela.
Michael Gottlieb: Willkie has represented CITGO Petroleum Corporation (“CPC”) and its U.S.-based parent companies, CITGO Holding (CHI) and PDV Holding (“PDVH”), for many years now. At the time this dispute arose in 2019, we were representing the CITGO entities in Delaware Chancery Court litigation in which the Maduro regime was challenging the legitimacy of all three companies’ boards of directors, and also representing the companies in various matters before the U.S. Government including the Treasury Department’s Office of Foreign Assets Control (OFAC). Willkie also had considerable experience in complex cross-border litigation involving sovereign debt. That experience, and our familiarity with the companies and their ongoing legal challenges, positioned us well to handle the litigation.
Who is on your teams and how have you divided the work on this matter, both at the trial court and the appellate courts?
Gottlieb: From the filing of this litigation through the most recent appellate proceedings, Paul Hastings and Willkie have worked seamlessly together as what we like to call a “virtual firm,” with each firm taking the lead on different issues as circumstances require. In the trial court, we divided up fact and expert witnesses in discovery, and then each firm took the lead on different issues at the summary judgment stage—Paul Hastings had the lead on the choice of law issues, while Willkie took the lead on the act of state and international comity doctrine issues. Before the Second Circuit, we kept the same division of labor at oral argument, and we were joined by Don Verrilli from Munger, Tolles, & Olson, who argued as amicus on behalf of the Venezuelan Republic.
Our teams have evolved considerably since the launch of this case in 2019, although some of us have been involved from day one. For the Willkie team, I have worked with partners Kristin Bender, Jeff Korn and Nick Reddick, associates Melissa Taustine, Amanda Payne, Tim Ryan, Alexis Dorner and Charlene Ni, and paralegal Monica Jones.
Timofeyev: There is an old adage that success has many fathers, but that is true in this case. From our side, the person who has been leading our litigation effort from its inception, and has been instrumental in formulating and executing the overall strategy is Kurt Hansson. We would not have achieved this victory without Kurt’s leadership. We are also fortunate to have a great team of attorneys and staff from our New York office, without whom this victory would not have been possible: James Ferguson has worked on this case since day one, both through the district court and the appellate stage; Benjamin Gilberg joined the effort once we went up to the Second Circuit; and Rosetta Kromer provided expert paralegal support throughout the entire litigation. James Bliss, who has since left the firm, was also a major contributor.
Why does it matter whether New York or Venezuelan law applies to the validity of these bonds? What are the key differences here?
Timofeyev: This was the central issue on appeal. The Venezuelan Constitution requires that contracts of national public interest entered into by state-owned entities, such as the PDVSA, be authorized by the National Assembly. Here, the National Assembly gave no such authorization for the issuance of the 2020 bonds; on the contrary, it passed a formal resolution criticizing the bond exchange offer. If we are right that the Venezuelan Constitution required this transaction to be authorized by the National Assembly, then the 2020 bonds—and the purported pledge of CITGO—are invalid and unenforceable. New York law contains no such requirement, which is unsurprising since New York law is not concerned with demarcating institutional competence between executive and legislative branches of a foreign government.
What position has the U.S. government taken in this dispute?
Gottlieb: The U.S. government has expressed views relating to this dispute both in and outside of court. As a policy matter, the U.S. sanctions regime regulates the bonds at issue in the litigation, including the ability of bondholders to exercise rights purportedly granted to them by the Indenture and Pledge Agreement. As the government explained in its statement of interest (filed in 2020), current U.S. sanctions policy (which remains in effect as of today) is designed to advance U.S. “policy goals of, among other things, preserving assets in support of the interim government’s efforts to restore democracy in Venezuela and reconstruct the Venezuelan economy after Maduro steps aside, including through executive actions such as sanctions that currently preclude certain transactions with respect to the 2020 Bonds and the sale of the asserted collateral for the bonds.” As for the specific legal issues in the case, the same statement of interest declined to take any position on the legal issues before the court at summary judgment because, in the government’s view, it was premature for the Executive Branch to opine given the numerous “issues of fact and Venezuelan law” that the government believed were antecedent to the act of state and international comity doctrines.
How were you able to persuade New York’s high court earlier this year that Venezuelan rather than New York law governed?
Timofeyev: This was really a case with a right answer. Under Uniform Commercial Code section 8-110, it is the law of the local jurisdiction of the securities’ issuer that governs the validity of the transaction. As we demonstrated, that plainly includes the jurisdiction’s constitutional requirements; it is not limited, as the other side argued, to compliance with corporate formalities. We were able to show that the UCC text and structure favored our interpretation, as did the Official Commentary of the Uniform Law Commission. We also showed how this result made sense in terms of general conflict of laws principles and what the New York Legislature intended when they enacted the relevant UCC provisions. And there it was critical—as it often is in any important appeal—to have strong amici support, which we had from both the National Assembly-led Venezuelan government and from several academics. One amicus brief that, I think, was particularly influential in convincing the New York Court of Appeals was that filed by Kermit Roosevelt, who is a law professor at the University of Pennsylvania Carey Law School and is also the Reporter for the Third Restatement of Conflict of Laws. Still, it was a bit daunting to stand up in front of the New York highest court and tell them they should apply foreign—not New York—law!
What’s significant here in the latest Second Circuit decision for your clients?
Gottlieb: For our clients, the decision is significant because it wipes the bondholders’ $1.9 billion judgment off the books, and confirms that the validity of the 2020 bonds must be decided, as we have argued from day one, as a matter of Venezuelan law. The decision, along with the earlier certification opinion by the panel, also made important factual findings that properly explain how the Venezuelan National Assembly sought to exercise its constitutional authorities in 2016 when the Assembly voted to “reject categorically” the terms of the Maduro regime’s proposed bond exchange. But the significance of the decision extends beyond this case. As the Republic and a group of legal scholars argued as amici, before the Second Circuit and New York Court of Appeals, the application of foreign law to the validity of foreign sovereign debt issuances is significant for the promotion of democracy and the rule of law. This is particularly so in Latin America, which has experience with corrupt efforts by repressive regimes that have sought to circumvent democratically-elected legislatures, as Maduro attempted to do with the 2016 Exchange Offer. By establishing that the constitutional restrictions imposed by an issuer’s jurisdiction governs the validity of this kind of debt, this case reinforces that New York law will not serve as a safe haven for foreign leaders seeking to circumvent the will of their people.
What comes next in this litigation? The Second Circuit seemed to leave the trial court with some options about how to proceed.
Timofeyev: The case will be remanded to the district court to decide whether the National Assembly’s refusal to approve the Exchange Offer renders the bonds invalid. We feel confident that the answer is yes based on the opinion of one of the world’s foremost experts on the meaning of the Venezuelan constitution, which has been backed up by the interpretation of Venezuelan law offered by the Venezuelan Republic. But even if the trial court rules against us on that question, the Second Circuit explained the act of state doctrine may apply, given that the National Assembly enacted formal resolutions rejecting the exchange. We look forward to addressing both issues on remand.
What will you remember most about getting this result for your client?
Gottlieb: As for this particular result, I will remember the virtual argument before the Second Circuit on Jan. 26, 2022, which was a marathon argument (happening to fall on my birthday) lasting for more than two hours with active questioning from the full panel. When the argument finished, while we thought it was possible that the case might be certified, we certainly did not come close to predicting all of the twists and turns we would face between then and now!
Timofeyev: I remember getting an initial skeptical reception from several judges of the New York Court of Appeals, and then starting to feel midway through the argument—particularly on rebuttal—that we may have turned them around and made them think why our reading of the statute is the one that makes sense. At the end, I was pleasantly surprised to get a unanimous opinion agreeing with our reading of the New York UCC.
On a personal note, I will remember that this is the first of my arguments that my mother—who lives in Albany, where New York highest court sits—was able to attend. The court’s staff could not have been more gracious and courteous to her, even as my attention was focused on the upcoming argument.
