Red Tree Investments, LLC v. Petroleos De Venezuela, S.A.

Background

These consolidated actions concerned money Red Tree claimed under three debt instruments. The instruments included notes issued under a 2015 Note Agreement and a 2016 Note Agreement, as well as a 2016 Credit Agreement. The original note principal was approximately $450 million, and the opinion states that the notes assigned to Red Tree involved approximately $63.5 million plus unpaid interest. The opinion separately states that Red Tree claimed principal and interest under the Credit Agreement.

General Electric entities were the original noteholders and lender. On January 25, 2019, the rights under the notes and Credit Agreement were assigned to Red Tree. PDVSA was the issuer or borrower, and PDVSA Petróleo, S.A. (Petróleo) guaranteed PDVSA’s payment obligations. The defendants are described in the opinion as instrumentalities of the Venezuelan government.

The actions began in New York state court and were removed to federal court. Red Tree moved for summary judgment, meaning it asked the court to rule without a trial because it claimed there was no genuine dispute about facts that mattered to the outcome. During the case, defendants sought additional time and discovery. Red Tree produced more than 13,000 pages of documents, and the discovery period was extended more than once.

Red Tree’s evidence

Red Tree submitted the agreements, notes, assignments, notices, and affidavits concerning the debt, defaults, and amounts owed. For each note agreement, the court found that Red Tree showed executed instruments containing unconditional payment obligations and failures to pay. For the Credit Agreement, Red Tree showed the agreement, disbursements, default, notice, assignment, and notice of assignment. As to Petróleo, Red Tree showed the guaranties, the underlying debts, demand, and Petróleo’s failure to pay.

The defendants did not dispute the existence or validity of the notes, the Credit Agreement, the borrowings, the defaults, the assignments, or the notices. Their principal argument was that United States sanctions made payment impossible. Petróleo did not present a separate defense to its guaranty obligations.

Impossibility defense

Under New York law, the impossibility defense excuses performance only when an unexpected event makes the subject matter of a contract or the means of performing objectively impossible. The defense is applied narrowly, and the event must not have been foreseeable or capable of being addressed in the contract.

The court reviewed United States sanctions concerning Venezuela. It concluded that the relevant executive order did not prohibit payment of preexisting debt, and that guidance from the Office of Foreign Assets Control stated that United States persons could collect and accept payment on qualifying preexisting debt. After PDVSA was designated as a blocked person, General License 9 authorized transactions ordinarily necessary to deal with PDVSA-related debt issued before the effective date of the earlier sanctions order. The opinion states that the parties did not dispute that Petróleo was covered by the license.

Defendants relied on delayed or rejected payments by intermediary banks and on banks’ concern about sanctions-related risks. The court accepted, for purposes of the motion, that some banks initially rejected payments because of those risks. But it noted that two payments initially rejected by Deutsche Bank were later resubmitted and transferred, and that another bank had successfully processed two payments before rejecting a later one. The court also found that defendants had not shown efforts to reassure banks that payment was lawful, obtain legal advice, use available sanctions guidance, or seek a more explicit license.

The court held that no reasonable jury could find for defendants on the impossibility defense. It also gave an alternative reason: the parties could have anticipated expanded sanctions and banking difficulties. The agreements required PDVSA to maintain approvals and licenses needed to make payments, and the Credit Agreement addressed the possibility that activities could become subject to sanctions. None of the agreements excused or postponed payment merely because banks were reluctant to process lawful payments.

Petróleo’s guaranty liability

The court separately granted summary judgment against Petróleo. The guaranty provisions described Petróleo’s obligations as unconditional and absolute and waived defenses based on defenses available to PDVSA or the unenforceability or cessation of the underlying obligations, except payment in full. Applying New York law, the court held that the broad waiver foreclosed Petróleo’s defenses to enforcement of the guaranties.

Discovery argument and disposition

Defendants argued that they lacked access to all potentially relevant documents and that granting summary judgment would violate due process. The court rejected that argument. It emphasized the time available after removal, the more than 13,000 pages produced, the depositions taken, the extensions of discovery, and defendants’ failure to move to compel discovery or identify what missing documents would show about impossibility.

The court granted Red Tree’s motions for summary judgment against PDVSA and Petróleo in both actions. It directed Red Tree to submit proposed final judgments within 14 days, including unpaid balances, accrued interest, and later daily interest calculations. Defendants would have 7 days to respond, and the court set a 21-day period after entry of judgment for defendants’ attorney-fee motions.