51 F.4th 456
2d Cir.2022Background
- In 2016 PDVSA (Venezuela’s state-owned oil company) executed an exchange turning unsecured 2017 notes into secured 2020 notes collateralized by a 50.1% pledge of CITGO Holding stock; governing documents specified New York law.
- The Venezuelan National Assembly (opposition-controlled) passed resolutions in May and September 2016 rejecting executive actions to execute "contracts of national public interest" without Assembly approval and specifically opposing pledging CITGO; PDVSA proceeded anyway.
- After the U.S. recognized Juan Guaidó in 2019, an Ad Hoc PDVSA board (recognized in U.S. courts) sued in S.D.N.Y. seeking declarations that the 2020 Notes, Indenture, and Pledge were void for lack of National Assembly approval under Articles 150/187 of the Venezuelan Constitution.
- The district court applied New York law, rejected the PDV Entities’ act-of-state and choice-of-law arguments, held the Governing Documents enforceable, and entered judgment for the creditors; PDV Entities appealed.
- The Second Circuit concluded the act-of-state question depends on antecedent choice-of-law issues, found New York choice-of-law questions novel and important, and therefore certified three determinative questions to the New York Court of Appeals rather than resolving them.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does N.Y. UCC § 8-110(a)(1) require Venezuelan law to determine the validity of the 2020 securities? | § 8-110(a)(1) makes the issuer's local law (Venezuela) govern securities validity, including constitutional defects. | The clause should be read narrowly; parties’ New York choice-of-law and cases favoring enforcement of such clauses mean New York law governs. | Court could not predict; certified the question to the NY Court of Appeals. |
| Does New York common law require applying Venezuelan substantive law to decide PDVSA’s authority/capacity to issue the bonds? | Authority/capacity of a foreign state-owned issuer should be resolved under its domestic law; Venezuela has materially greater interest. | New York enforces contractual choice-of-law clauses; public-policy or exceptions to enforcement are narrow and not obviously applicable. | Court identified possible common-law exceptions but declined to decide; certified the question. |
| Does the act-of-state doctrine compel U.S. courts to honor National Assembly resolutions (voiding the Exchange) and therefore invalidate the bonds? | The Assembly’s withholding/ resolutions were sovereign acts that, under Venezuelan law, void the Exchange; U.S. courts must accept those acts. | Even if sovereign acts, U.S. law (and precedent) may not treat them as retroactively voiding the bonds; act-of-state applies only if foreign-law validity is outcome-determinative. | Court held act-of-state analysis is antecedent to choice-of-law; reserved ruling and tied resolution to NY Court of Appeals’ answers. |
| Are the Governing Documents valid under New York law despite Venezuelan constitutional arguments? | If Venezuelan law governs, the documents are void for lack of Assembly approval. | Under New York law the documents are valid; the New York choice-of-law clauses and center-of-gravity point to New York law. | District court held they were valid under New York law; Second Circuit did not disturb that holding but certified key choice-of-law questions rather than resolve them definitively. |
Key Cases Cited
- Allied Bank Int’l v. Banco Crédito Agrícola de Cartago, 757 F.2d 516 (2d Cir.) (doctrine limits retroactive voiding of foreign-issued debt)
- Celestin v. Caribbean Air Mail, Inc., 30 F.4th 133 (2d Cir. 2022) (recent exposition of act-of-state doctrine and its limits)
- W.S. Kirkpatrick & Co. v. Environmental Tectonics Corp., 493 U.S. 400 (1990) (act-of-state doctrine grounded in separation-of-powers/foreign-affairs concerns)
- Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941) (federal courts apply forum state choice-of-law rules in diversity)
- IRB-Brasil Resseguros, S.A. v. Inepar Invs., S.A., 20 N.Y.3d 310 (2012) (New York Court of Appeals gives strong effect to parties’ New York choice-of-law election)
- Ministers & Missionaries Benefit Bd. v. Snow, 26 N.Y.3d 466 (2015) (parties’ New York choice can override codified conflicts directives when clause is a valid election)
- Indosuez Int’l Fin. v. Nat’l Reserve Bank, 98 N.Y.2d 238 (2002) (most-significant-relationship analysis for foreign authority issues)
- Welsbach Elec. Corp. v. MasTec N. Am., Inc., 7 N.Y.3d 624 (2006) (public-policy exception to enforcement of choice-of-law clause)