The Second Circuit Court of Appeals has upheld the validity of a bond swap involving Venezuela's state-owned oil company, Petróleos de Venezuela, S.A. (PDVSA), despite claims that the transaction was unauthorized. The ruling, issued on October 27, 2026, affects PDVSA and its creditors, including MUFG Union Bank and GLAS Americas LLC, and clarifies the legal standing of the 2020 Notes issued in exchange for 2017 Notes.

This case, docket number 25-2652, stems from a complex financial arrangement initiated in 2016 when PDVSA offered a bond swap to holders of unsecured notes due in 2017. The bond swap allowed these holders to exchange their notes for new, secured notes due in 2020, backed by a controlling interest in CITGO Holding, Inc. The situation became contentious after PDVSA defaulted on its payments in 2019, raising questions about the legality of the bond exchange.

The PDV Entities, which include PDVSA, PDVSA Petróleo, S.A., and PDV Holding, Inc., argued that the bond swap was void under Article 150 of the Venezuelan Constitution. They claimed that the transaction required approval from Venezuela's National Assembly, which they asserted was not obtained. The PDV Entities also contended that resolutions passed by the National Assembly in 2016 and 2019 disapproved of the transaction, rendering it void under the act-of-state doctrine.

The dispute reached the Second Circuit after the New York Court of Appeals ruled that the validity of the bond swap should be determined under Venezuelan law. The U.S. District Court for the Southern District of New York subsequently ruled that the bond swap was valid and that the act-of-state doctrine did not apply. This decision was appealed, leading to the recent ruling by the Second Circuit.

The Ruling

The Second Circuit Court affirmed the lower court's decision, stating that the bond swap and the 2020 Notes were valid under Venezuelan law. The court found that the PDV Entities did not provide sufficient evidence to support their claims regarding the lack of authority to execute the transaction. It stated, "Article 150 of the Venezuelan Constitution does not invalidate the Exchange Offer," and concluded that the act-of-state doctrine was not applicable in this case.

The ruling was delivered by a panel of judges, including Judges Nardini, Lee, and Robinson. The court emphasized that the determination of the validity of the bond swap was a legal question that did not require deference to the PDV Entities' assertions regarding the National Assembly's resolutions.

Impact

This ruling has significant implications for both PDVSA and its creditors. By affirming the validity of the bond swap, the court has allowed MUFG Union Bank and GLAS Americas to maintain their claims against the collateral pledged by PDVSA. This decision also sets a precedent regarding the interpretation of Venezuelan law in international financial transactions, particularly in the context of state-owned enterprises.

The ruling may also influence future dealings involving Venezuelan state assets, especially in light of ongoing political turmoil in the country. Creditors of PDVSA may feel more secure in their investments, while the ruling reinforces the importance of adhering to legal standards in international financial agreements.

What's Next

The PDV Entities may consider further appeals, although the Second Circuit's decision is a significant legal hurdle. Additionally, there are related cases pending that involve PDVSA's assets and their management under U.S. sanctions. The ongoing developments in Venezuela's political landscape may also impact the future of PDVSA and its financial obligations.