Impossibility. Impracticality. The district court finds that paying off a debt was not impossible under U.S. sanctions imposed on the Venezuelan oil and gas company in 2017.
Dresser Rand Co. v. PDVSA, No. 19 Civ. 2689 (SDNY December 9, 2021) [click for opinion]
On January 20, 2017, plaintiff Dresser Rand Company (“DR”), an American engineering and manufacturing company owned by Siemens Energy, and defendant Petróleos de Venezuela, SA (“PDVSA”), an oil and gas company owned to the Venezuelan State, entered into a ticket and ticket contract (the “Contract”). Under the agreement, in exchange for a $120 million loan issued by DR to PDVSA, PDVSA would make installment payments of principal and interest until the debt is repaid in January 2020.
PDVSA made the first two quarterly interest payments in accordance with the agreement and attempted, unsuccessfully, to make the third payment. PDVSA said it was unable to make the third payment due to US sanctions imposed by the Trump administration, which prohibited US entities from providing loans to PDVSA and the Venezuelan government. The question before the court was whether the doctrine of impossibility exempted PDVSA from fulfilling its obligation to repay its loan under the agreement.
The court concluded that it was up to PDVSA to prove that his execution was objectively impossible. To discharge this burden, PDVSA argued that it was objectively impossible to make a payment under the agreement for two reasons: (1) US sanctions prohibited such payments; and (2) PDVSA attempted to make payment three times to DR’s Citibank and Deutsche Bank accounts, but the banks refused to process the payments in accordance with their internal risk policies.
The court initially rejected PDVSA’s argument that Executive Order 13808 (the “Executive Order”), issued on August 15, 2017, prohibited US entities from entering into transactions such as the PDVSA Agreement. Citing the wording of the order, the court held that only “new debts” were prohibited by the order, not “pre-existing debts” like the agreement, which was entered into on January 20, 2017, nearly seven months before the publication of the ordinance.
The court also rejected PDVSA’s argument that DR’s agreement to waive payment for an additional 30 days changed the length of PDVSA’s term of payment, creating a “new debt” prohibited by the order. The court cited language from FAQ 553 of the order, which stated in relevant part that “U.S. Persons may collect and accept payment of such [preexisting] debt regardless of whether. . . PDVSA pays according to the agreed payment period.” If DR’s acceptance of a late payment constituted a change in the duration of the repayment period, the quoted text “would serve no purpose”.
In addition to the language of the text, the court took into account the purpose of the sanction. The court found that the Office of Foreign Assets Control (“OFAC”) was concerned with protecting US entities by allowing them to collect pre-existing debts. This objective, the court observed, would not be achieved if the court found that the 30-day payment waiver extended the length of the repayment period to create new debt. Therefore, the court held that the agreement, with an unchanged term from January 20, 2017 to January 20, 2020, constituted a pre-existing debt that was not contemplated under the order and was not prohibited.
In response to PDVSA’s second argument, that it was impossible to make payments to DR through his bank accounts, the court said that in order to claim impossibility, PDVSA had the burden of demonstrating that it had taken “substantially all steps within its power to perform its obligations under the contract.” The court found that PDVSA failed to meet this burden. The court found that other banks, including Commerzbank and Novo Bank, would likely have processed payment from PDVSA to DR if PDVSA had chosen these options.
The court further rejected PDVSA’s argument that the use of either of the two banks would have turned the agreement into a new debt prohibited by the United States because the two banks would have demanded that the money is processed in euros (as opposed to US dollars as prescribed by the agreement). Like the waiver argument, the court found that payment in euros rather than dollars was an “administrative” change, not an alteration in the “character of the debt” that would turn the instrument into a a new debt.
“bargain,” which would defeat the purpose of the penalty. Accordingly, the court dismissed PDVSA’s defense of impossibility and entered judgment against it on the note.
Martine Gaetan of the Washington DC office contributed to this summary.
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