New York Appeals Court Upholds Validity of PDVSA 2020 Bonds Secured by CITGO Stake
Key Facts
The U.S. Court of Appeals for the Second Circuit on October 27, 2026, upheld a ruling rejecting an appeal by affiliates of Venezuelan oil company PDVSA over the validity of its 2020 bonds and the documents governing them, affirming the district court's decision on the bonds' validity. The decision followed oral arguments held on May 14, 2026, and concluded by summarily affirming the challenged ruling: "We affirm the judgment." The dispute concerns bonds issued by PDVSA, not sovereign bonds issued directly by the Republic of Venezuela. The ruling also does not establish a general rule barring a country from applying its domestic law in debt disputes; it addresses the validity of this issuance and its documents under Venezuelan law. Its practical effect is tied to the bond collateral and the sale process involving assets linked to CITGO.
The case stems from a bond exchange PDVSA conducted in October 2016, after which it issued the 2020 bonds. Before the exchange, the company had faced an outstanding principal balance of more than $7 billion on its 2017 bonds in September 2016, according to the Second Circuit's account of the background. Holders representing 39.43% of the outstanding principal of the 2017 bonds accepted the exchange offer. PDVSA Petróleo guaranteed the new issuance, and a 50.1% stake in CITGO Holding was pledged as collateral. PDVSA defaulted on payments on the 2020 bonds in October 2019, leading to a dispute over the validity of the securities and their governing documents.
PDVSA affiliates argued that the 2020 bonds and their documents were void from the outset because, they said, they were contracts of national public interest requiring approval by Venezuela's National Assembly, which they said had not been given. The district court concluded that this characterization did not apply to the contracts at issue, since the Republic itself must be a party to a contract for it to qualify as one of national public interest, rather than a state-owned company such as PDVSA. Accordingly, the court ruled that the bonds and their governing documents were valid under Venezuelan law, and found that the absence of National Assembly approval did not invalidate them. The Second Circuit upheld that conclusion on appeal. The ruling therefore remained focused on the nature of the parties to the contracts and the validity of a particular issuance, not on challenging every debt linked to the Venezuelan state.
The district court also considered the argument related to the act of state doctrine, which bars courts from invalidating the official acts of a foreign state. It ruled that the doctrine did not prevent it from considering the National Assembly's official acts in this case. The court said the United States recognizes the National Assembly as Venezuela's legitimate authority, allowing it to examine arguments concerning the Assembly's legislative role without that meaning it accepted the challenge to the bonds' validity. In an earlier partial judgment issued in 2020, MUFG and GLAS were awarded $1.9 billion for missed principal and interest payments. That amount relates to the earlier judgment and is not a specified value for the 2026 appellate ruling.
The dispute extends to a sale plan involving CITGO shares, with the Second Circuit saying the plan allocates more than $2 billion to repay at least two-thirds of the 2020 bonds. The district court ruling was also linked, according to Reuters, to the launch of auction proceedings for shares in CITGO's parent company, with the decision expected to help untangle complications in the auction. Upholding the ruling strengthens the legal basis for the validity of the bonds underlying creditors' claims in this process, while any action involving the shares remains subject to relevant restrictions and licenses. The Second Circuit said the effective date of a license related to a CITGO share transaction linked to the bonds was postponed to November 5, 2026. Until that date, the postponement limits creditors' ability to enforce against the shares without an additional license.