Investment Securities.

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Author: Carl S. Bjerre
Date: Fall 2021
From: Business Lawyer(Vol. 76, Issue 4)
Publisher: American Bar Association
Document Type: Article
Length: 5,563 words
Lexile Measure: 1940L

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One of the most interesting developments in the Investment Securities field during the period covered by this year's Uniform Commercial Code Survey is an opinion from the United States District Court for the Southern District of New York involving the enforceability of bonds issued in 2017 by the Bolivarian Republic of Venezuela. The opinion, Petroleos de Venezuela, S.A. v. MUFG Union Bank, N.A., (1) devotes careful attention to parts of U.C.C. Article 8's important choice-of-law provisions.


At issue in the case, known as the PDVSA case, is what body of law controls a sovereign issuer's assertion that its bonds were not validly issued. Is it the issuer's own domestic law (including that nation's constitutional law), which in this case may or may not provide that the bonds are not valid; or is it the law specified in the bond issue's governing law clause, which in this case would provide that the bonds are valid? This article explains that U.C.C. section 8-110(a)(1) broadly mandates the former, although the district court's opinion in this instance settles upon the latter. At the time of this writing the case is on appeal.


In 2016, confronted by a severe cashflow crisis and the possibility of default on existing debt securities, Venezuela's Nicola's Maduro regime arranged a debt exchange offer pursuant to which approximately $9 billion in principal amount of unsecured notes, previously issued by Petro' leos de Venezuela, S.A ("PDVSA") and due to mature in 2017, were exchanged for new notes to fall due in 2020 and which became the securities at issue in this litigation. These new notes (the "Notes"), also issued by PDVSA, were putatively secured by the pledge of a controlling interest in CITGO Holding, Inc.--the U.S.-based centerpiece of Venezuela's national oil industry and hence a high profile national asset. (PDVSA is wholly owned by the Bolivarian Republic of Venezuela, as required by its Constitution. (2) PDVSA's wholly owned Delaware subsidiary, PDV Holding, Inc., acted as pledgor of the CITGO equity. (3))

Article 150 of the Venezuelan Constitution requires prior authorization by Venezuela's National Assembly of the execution of contracts in the "national public interest." (4) Far from authorizing the transaction, during the exchange offer's late 2016 pendency the opposition-led National Assembly explicitly condemned it and "reject[ed] categorically" the pledge of the CITGO equity, as well as initiating an investigation into the exchange offer and the alleged mismanagement of PDVSA. Nonetheless the transaction was ultimately executed, with the Notes being issued in late October 2016 following acceptance of the exchange offer by holders of approximately 39 percent in aggregate principal outstanding amount of the 2017 Notes. (5)

Dramatic events subsequent to the issuance of the Notes, also potentially relevant to the merits of their validity, can only be briefly summarized here. Maduro was the victor in a 2018 election whose legitimacy was widely disputed (including by the United States). In January 2019 the National Assembly declared its president, Juan Guaido,...

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Gale Document Number: GALE|A681135814