District Court Decision Incorrectly Holds That OFAC Sanctions Bar PdVSA From Making Payment On Pre-Sanctions Debts

On February 11, 2020, Judge Stanton of the U.S. District Court for the Southern District of New York denied Dresser-Rand Company's (Dresser Rand) motion for summary judgment in a suit to collect on a promissory note issued by Petróleos de Venezuela, S.A. (PdVSA). The Court's decision turned on a finding that payment by PdVSA was legally impossible under U.S. sanctions. That finding was based on incomplete briefing by the parties and appears seriously flawed given the licenses and guidance provided by the Department of Treasury's Office of Foreign Assets Control (OFAC). We discuss the decision and the U.S. sanctions regime as applied to the promissory note below.

The Order and the Parties' Submissions

According to the opinion and order issued by the Court (the Order), Dresser-Rand holds a note issued by PdVSA on January 20, 2017, and guaranteed by PdVSA Petróleo, S.A. (Petróleo), a wholly owned subsidiary of PdVSA, for the principal sum of $119,645,069.70. PdVSA made its first two payments on the note, but subsequent attempts at payment were rejected by Dresser-Rand's bank for internal policy reasons following the U.S. imposition of targeted sanctions against PdVSA on August 25, 2017. PdVSA and Dresser-Rand discussed other methods of payment, but default on the payments continued. In February 2019, Dresser-Rand filed suit via a motion for summary judgment in lieu of complaint against PdVSA and Petróleo.

The Order addressed whether U.S. sanctions provided PdVSA and/or Petróleo an impossibility defense (i.e., whether "governmental sanctions make it impracticable or impossible . . . to pay Dresser-Rand"). The Court found that Petróleo as guarantor had waived all defenses except for complete payment and granted summary judgment against Petróleo. However, the Court also held that U.S. sanctions (in particular, blocking sanctions imposed pursuant to Executive Order (E.O.) 13850) "make it legally impossible here for PdVSA to pay Dresser‑Rand,"1 which the Court found created a disputed factual issue precluding summary judgment and necessitating a trial over PdVSA's impossibility of payment defense.. As discussed below, the Court's finding fails to take into account (and the parties failed to brief) general licenses and guidance issued by OFAC that make it clear that PdVSA is not prohibited from making payments on pre-sanctions debt.

Both PdVSA and Petróleo (as a subsidiary of PdVSA by operation of OFAC's 50 Percent Rule) are subject to blocking...