State of New York OPINION Court of Appeals This opinion is uncorrected and subject to revision before publication in the New York Reports.
No. 6 Petróleos de Venezuela S.A., et al., Appellants, v. MUFG Union Bank, N.A. et al., Respondents.
Igor V. Timofeyev, for appellants. Jonathan H. Hurwitz, for respondents. Chamber of Commerce of the United States et al., Bolivarian Republic of Venezuela, George A. Bermann et al., Kermit Roosevelt, III, amici curiae.
TROUTMAN, J.:
In 2016, Venezuela’s state-owned oil company offered a bond swap through which
its noteholders could exchange unsecured notes due in 2017 for new, secured notes due in
2020. The United States Court of Appeals for the Second Circuit certified three questions
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to this Court concerning the extent to which New York law governs this transaction. Upon
reformulating the first question, we answer that Venezuelan law governs the validity of the
notes under Uniform Commercial Code § 8-110 (a) (1), which encompasses within its
scope plaintiffs’ arguments concerning whether the issuance of the notes was duly
authorized by the Venezuelan National Assembly under the Venezuelan Constitution—i.e.,
whether there is a defect in the notes occasioned by the application of a constitutional
provision bearing on the procedure through which the notes were issued. We emphasize,
however, that New York law governs the transaction in all other respects, including the
consequences if a security was “issued with a defect going to its validity” (UCC 8-202 [b]
[1]-[2]). Given our answer to the first certified question, we need not answer the remaining
questions.
I.
Plaintiffs are three related entities. Petróleos de Venezuela, S.A. (PDVSA) is an oil
and gas company wholly owned by the Venezuelan government (Venezuelan Const art 303
[“the State shall retain all shares of” PDVSA]). PDVSA Petróleo S.A. (Petróleo) is
incorporated in Venezuela and is a wholly owned subsidiary of PDVSA. PDV Holding,
Inc. (PDVH), also a wholly owned subsidiary of PDVSA, is incorporated in Delaware and
has its principal place of business in Houston, Texas. PDVH wholly owns CITGO
Holding, Inc., which is the sole owner of CITGO Petroleum Corporation, a refiner and
marketer of petroleum products in the United States. Nonparties CITGO Holding and
CITGO Petroleum Corporation are both incorporated in Delaware with a principal place of
business in Houston.
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II.
As relevant here, Article 150 of the Venezuelan Constitution mandates that “[t]he
execution of national public interest contracts shall require the approval of the National
Assembly in those cases in which such requirement is determined by law.” It further
provides, “No municipal, state or national public interest contract shall be executed with
foreign States or official entities, or with companies not domiciled in Venezuela, or shall
be transferred to any of them without the approval of the National Assembly.” And section
9 of Article 187 states that “[i]t is the role of the National Assembly to . . . [a]uthorize the
National Executive to enter into contracts of national interest, in the cases established by
law,” and to “[a]uthorize contracts of municipal, state and national public interest, with
States or official foreign entities or with companies not domiciled in Venezuela.” The
Venezuelan Constitution defines neither the term “national public interest contract” nor
“contracts of national interest.”
III.
In April 2007, PDVSA issued $3 billion of unsecured notes scheduled to come due
in April 2017. In October 2010 and January 2011, PDVSA further issued a combined total
of $6.15 billion in additional notes scheduled to come due in November 2017. These
issuances are collectively referred to as the “2017 Notes.” As the maturity date of the 2017
Notes approached, it became clear that, due to declining oil revenues, PDVSA was likely
to default on the 2017 Notes.
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In May 2016, Venezuelan President Nicolás Maduro declared a “State of Exception
and Economic Emergency” granting himself the authority to execute public interest
contracts unilaterally. Thirteen days later, Venezuela’s unicameral National Assembly
passed a resolution reciting that, “[i]n relation to contracts of national . . . public interest
concluded by and between the National Executive and . . . companies not domiciled in
Venezuela, the Constitution categorically mandates, without exception, the approval of the
National Assembly.” The resolution further “warn[ed] that any activity carried out by an
organ that usurps the constitutional functions of another public authority is null and void
and shall be considered non-existent,” and it “remind[ed] that the contracts of national . . .
public interest concluded by and between the National Executive and . . . companies not
domiciled in Venezuela, without the approval of the National Assembly . . . , shall be null
and void in their entirety.”
Nonetheless, in early September 2016, PDVSA’s Board of Directors approved the
transaction at issue in this case: a bond exchange through which holders of the 2017 Notes
could tender them in exchange for new notes with principal due in 2020 (2020 Notes). The
parties agree that the transaction was an attempt to avoid default on the 2017 Notes by
effectively pushing the maturity date back an additional three years. The 2020 Notes were
secured by a pledge, from PDVH, of 50.1% of the equity in CITGO Holding. The pledge
was memorialized in a Pledge Agreement naming PDVH as pledgor, PDVSA as issuer,
Petróleo as guarantor, defendant GLAS Americas, LLC (GLAS) as collateral agent, and
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defendant MUFG Union Bank, N.A. (MUFG) as trustee.1 In addition to the Pledge
Agreement, the documents governing the exchange offer included the Indenture governing
the 2020 Notes and the Global Notes evidencing the obligations of PDVSA and Petróleo
to registered holders of the 2020 Notes (collectively, the Governing Documents).2
PDVSA’s sole shareholder, the Venezuelan government, purportedly approved the
exchange offer on September 8, 2016, through the President and Director of PDVSA.
However, plaintiffs allege that the National Assembly did not authorize the transaction.
The Indenture contains a New York choice-of-law provision nearly identical to
those found in the other Governing Documents:
“This Indenture and the notes shall be construed in accordance with, and this Indenture and the notes and all matters arising out of or relating in any way whatsoever to this Indenture and the notes (whether in contract, tort or otherwise) shall be governed by, the laws of the State of New York without regard to the conflicts of law provisions thereof (other than Section 5- 1401 of the New York General Obligations Law).” 3
1 MUFG is a U.S. banking institution with offices in New York. GLAS is a limited liability company organized under New York law with offices in New York. 2 The 2020 Notes were issued through Global Notes registered in the name of Cede & Co. as nominee of the Depository Trust Company representing the total debt issued (see 51 F4th 456, 461 n 3 [2d Cir 2022]). 3 The choice-of-law provision in the Global Notes states as follows:
“This note shall be construed in accordance with, and this note and all matters arising out of or relating in any way whatsoever to this note (whether in contract, tort or otherwise) shall be governed by, the laws of the State of New York without regard
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The exchange offer had a New York nexus. Plaintiffs used a New York-based
financial adviser and an American law firm with New York partners to advise on the
structure of the offer. The Law Debenture Trust Company (DTC) of New York served as
the paying agent, transfer agent, and registrar for the Indenture. Further, the depository for
the Indenture is incorporated and headquartered in New York; the 2020 Notes were
deposited in New York; the collateral is held in a vault in New York; holders of 2017 Notes
who accepted the exchange offer had to tender their notes through DTC in New York; the
2020 Notes were registered through Cede & Co., a general partnership organized under
New York law and based in New York; and signature pages executing the Governing
Documents were exchanged in New York.
In September 2016, PDVSA announced the exchange offer. The National Assembly
responded by passing a second resolution reciting that the exchange offer required PDVSA
to “offer 50.1% of its position in the subsidiary company [CITGO Holding] as collateral,”
and that “Article 187 of the Constitution empowers the National Assembly to exercise
to the conflicts of law provisions thereof (other than Section 5- 1401 of the New York General Obligations Law).”
And the Pledge Agreement provides,
“This agreement shall be construed in accordance with, and this agreement and all matters arising out of or relating in any way whatsoever to this agreement (whether in contract, tort or otherwise) shall be governed by, the laws of the State of New York without regard to the conflicts of law provisions thereof (other than Section 5-1401 of the New York General Obligations Law).” -6- -7- No. 6
control functions . . . [,] with the power to obtain information about the financial statements
and details of any transaction that commits PDVSA’s assets as collateral.” The resolution
resolved to “reject categorically that, within the swap transaction, 50.1% of the shares
comprising the capital stock of CITGO [Holding] are offered as a guarantee with priority[]
or that a guarantee is constituted over any other property of the Nation,” and it “urge[d] the
Public Ministry to open an investigation to determine if the current transaction protects the
National Property, in accordance with article[] 187, section 9 . . . of the Constitution.”
The exchange offer expired on October 21, 2016. Ultimately, holders of 39.4% of
the aggregate principal amount outstanding under the 2017 Notes—representing
approximately $2.8 billion—accepted the offer. PDVSA and its subsidiaries then executed
the exchange offer, with the 2020 Notes being issued on October 28, 2016, in a principal
amount of over $3.3 billion.
Maduro was re-elected President of Venezuela in 2018. In January 2019, the
National Assembly declared Maduro’s presidency illegitimate and named Juan Guaidó, the
president of the National Assembly, as interim President. The following month, the
National Assembly passed a law under which Guaidó appointed a competing, ad hoc board
of directors for PDVSA.
In October 2019, the National Assembly passed a third resolution specifically
addressing the exchange offer. It designated the Indenture a “national public contract” that
should have been authorized by the National Assembly under Article 150 of the
Constitution and asserted that the transaction was unauthorized.
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After making principal and interest payments in 2017 and 2018, and an interest
payment in April 2019, PDVSA defaulted by failing to make a scheduled payment in
October 2019. At the direction of the ad hoc board of directors, plaintiffs commenced this
action seeking a judgment declaring the 2020 Notes and the Governing Documents,
“invalid, illegal, null and void ab initio, and thus unenforceable.” Plaintiffs also sought an
order enjoining defendants from enforcing any remedies under the notes. Defendants
counterclaimed for a declaration that the 2020 Notes and the Governing Documents are
legal and enforceable and that an event of default had occurred, thereby entitling defendant
GLAS to sell the collateral. Defendants further asserted counterclaims for breach of
contract, unjust enrichment, and quantum meruit.
Following discovery, defendants moved for summary judgment on their breach of
contract counterclaim, and plaintiffs moved for summary judgment on all their claims.
Plaintiffs argued that the resolutions constituted sovereign acts that rendered the exchange
offer void under Venezuelan law and that the court should therefore decline to enforce the
2020 Notes under the act-of-state doctrine. Plaintiffs further argued that the 2020 Notes
and the Governing Documents were invalid under Venezuelan law because the exchange
offer involved a contract of national public interest requiring approval by the National
Assembly pursuant to Article 150 of the Venezuelan Constitution.
The United States District Court for the Southern District of New York (Polk Failla,
J.) granted defendants’ motion, denied plaintiffs’ motion, and declared, among other
things, “that the 2020 Notes and the Governing Documents are valid and enforceable; that
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a default has occurred under the terms of the Indenture; [and] that Defendants are permitted
to exercise the remedies for default set forth in the Indenture and the Pledge Agreement”
(495 F Supp 3d 257, 293 [SD NY 2020]). Relevant to the certification here, the court
further concluded that New York law, not Venezuelan law, governed the dispute. The
court acknowledged that the Governing Documents contained choice of law provisions but
proceeded under the assumption that those provisions were not effective, stating that even
if those provisions did control it would nonetheless need to assess the applicability of UCC
8-110. The court reasoned that UCC 8-110 (a) (1), which provides that “the validity of a
security” is governed by “[t]he local law of the issuer’s jurisdiction,” did not require the
court to apply Venezuelan law because the constitutional provisions at issue here do not
speak to “validity” under section 8-110 (id. at 284-286 [internal quotation marks omitted]).
In the court’s view, the term “validity” referred only to whether the securities were “duly
authorized” (id. at 285-286 [internal quotation marks omitted]).
Based on that assessment, the court concluded that Article 150 of the Venezuelan
Constitution did not speak to the authorization of the 2020 Notes because it applied to a
“broad category of contracts, and has nothing specifically to do with the issuance of
securities” (id. at 285-286). “[I]n lieu of any more specific choice of law rule,” the court
applied the “center of gravity” or “grouping of contacts” analysis to conclude that New
York law applies because New York “has the most substantial relationship to the
transaction and to the parties” (id. at 290 [internal quotation marks omitted]). Plaintiffs
appealed.
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IV.
The Second Circuit deferred decision because “[t]his case raises important questions
about the scope of an as-of-yet uninterpreted provision of the New York Uniform
Commercial Code[] and about potential common law exceptions to New York’s general
approach to enforcing contractual choice-of-law elections” that we have “not addressed”
and that “are important to the State’s choice-of-law regime and status as a commercial
center” (51 F4th 456, 460 [2d Cir 2022]). Consequently, the court certified the following
questions:
“1. Given [plaintiffs’] argument that the Governing Documents are invalid and unenforceable for lack of approval by the [Venezuelan] National Assembly, does New York [UCC] 8-110 (a) (1) require that the validity of the Governing Documents be determined under the Law of Venezuela, ‘the local law of the issuer’s jurisdiction’?
“2. Does any principle of New York common law require that a New York court apply Venezuelan substantive law rather than New York substantive law in determining the validity of the Governing Documents?
“3. Are the Governing Documents valid under New York law, notwithstanding [plainitffs’] arguments regarding Venezuelan law?” (id. at 475-476).
The Second Circuit explained that they did “not intend to limit the scope” of our analysis
by formulating the questions as they did, and they invited us to reformulate the questions
as we “deem appropriate” (id. at 476 [internal quotation marks omitted]).
Consistent with this invitation, we reformulate the first certified question as follows
in order to highlight the limited nature of the “validity” inquiry under UCC 8-110 (a) (1):
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1. Given the presence of New York choice-of-law clauses in the Governing Documents, does UCC 8-110 (a) (1), which provides that the validity of securities is determined by the local law of the issuer’s jurisdiction, require the application of Venezuela’s law to determine whether the 2020 Notes are invalid due to a defect in the process by which the securities were issued?
We answer this question in the affirmative. Matters going to the “validity of [the]
security” at issue here, that is the 2020 Notes, are governed by the law of Venezuela—i.e.,
the “the local law of the issuer’s jurisdiction” under UCC 8-110 (a) (1). Plaintiffs’
argument that the 2020 Notes are invalid—because their issuance contravened
constitutional provisions requiring National Assembly approval to issue the securities—
falls within the scope of “validity” as that term is used in UCC 8-110. Given our answer
to this question, we do not reach the second and third certified questions (see Self-Insurer’s
Assn. v State Indus. Commn., 224 NY 13, 16-17 [1918] [Cardozo, J.]; see also Cordero v
Transamerica Annuity Serv. Corp., 39 NY3d 399, 409 [2023], quoting NY Const, art VI,
§ 3 [b], cl 9; 22 NYCRR 500.27).
V.
The inclusion of a New York choice-of-law clause in a contract demonstrates the
parties’ intent that “courts not conduct a conflict-of-laws analysis,” which thereby
“obviates the application of both common-law conflict-of-laws principles and statutory
choice-of-law directives,” unless the parties or the legislature clearly express a contrary
intent (Ministers & Missionaries Benefit Bd. v Snow, 26 NY3d 466, 468 [2015]; see IRB-
Brasil Resseguros, S.A. v Inepar Invs., S.A., 20 NY3d 310, 312 [2012], cert denied 569 US
994 [2013]). Here, the Governing Documents state that they “shall be governed by[] the
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laws of the State of New York without regard to the conflicts of law provisions thereof
(other than Section 5-1401 of the New York General Obligations Law).” Because the
parties chose New York law, the documents are generally governed by New York’s
substantive law, except in the narrow category of cases that are subject to the statutory
choice-of-law directives set forth in § 5-1401 (1).
One such exception is, even where parties choose New York law, that law “shall
not apply . . . to the extent provided to the contrary in subsection (c) of section 1-301 of the
uniform commercial code” (id.). UCC 1-301 (c) (6) provides in turn that, if UCC 8-110
“specifies the applicable law, that provision governs and a contrary agreement is effective
only to the extent permitted.”
UCC 8-110 (a) (1) contains the UCC’s choice-of-law rules for the validity of
securities, providing that “[t]he local law of the issuer’s jurisdiction, as specified in
subsection (d), governs . . . the validity of a security.” Subsection (d), for its part, specifies
that the “[i]ssuer’s jurisdiction” is “the jurisdiction under which the issuer of the security
is organized or, if permitted by the law of that jurisdiction, the law of another jurisdiction
specified by the issuer” (UCC 8-110 [d] [internal quotation marks omitted]). Notably,
while subsection (d) allows an in-state issuer to “specify the law of another jurisdiction as
the law governing” certain matters, it does not allow an in-state issuer to choose another
jurisdiction’s law to govern the validity of the security (id.). And critically for our
purposes, out-of-state issuers like PDVSA may select another jurisdiction’s law only “if
permitted by the law of that jurisdiction” (UCC 8-110 [d]).
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The official comments to the UCC further clarify that UCC 8-110 proscribes such a
choice because “[t]he question whether an issuer can assert the defense of invalidity may
implicate significant policies of the issuer’s jurisdiction of incorporation” (UCC 8-110,
Comment 2). And, as observed when the legislature adopted revisions to UCC article 8 in
the 1990s, “[t]he ‘validity of a security, . . . refers to the validity in the sense of corporate
or other authority to issue securities, [and] is not included in the list of issues for which the
applicable law can be chosen” (Rep of Comm on Uniform State Laws and Banking Law
Comm of the Assn of the Bar of the City of NY [Rep of Comms], Feb. 21, 1996 at 22, Bill
Jacket, L 1997, ch 566). Moreover, “[t]his lack of choice is consistent with . . . the
prevailing view that the law under which an issuer is organized must govern whether a
security issued by that entity is valid, in the sense of having been issued pursuant to
appropriate corporate or other similar action” (id.). Consequently, under UCC 8-110, the
issuer of a security must abide by the validity requirements of its own jurisdiction.
The text and history of the provision leave no doubt that this is a mandatory rule.
Though General Obligations Law § 5-1401 must be read broadly to promote party choice
given that it reflects “the legislature’s desire to encourage parties to choose the New York
justice system to govern their contractual disputes,” (Ministers, 26 NY3d at 472; see IRB-
Brasil, 20 NY3d at 314), the statute states explicitly that it “shall not apply” where 8-110
is applicable (General Obligations Law § 5-1401 [1] [c]; see UCC 1-301 [c] [6]). In such
a case, “that provision governs” (UCC 1-301 [c]). The legislative history confirms that
exempting the validity of a security from New York’s otherwise broad endorsement of
- 13 - - 14 - No. 6
party choice was a purposeful decision made to accord with “the prevailing view” and the
policy considerations articulated by the authors of the UCC.
Therefore, this is not a case where “engaging in a conflict-of-laws analysis . . . would
frustrate the legislature’s purpose” (IRB-Brasil, 20 NY3d at 316). We reaffirm the
principle of IRB-Brasil and Ministers that when the parties have chosen New York Law, a
court may not contravene that choice through a common-law conflicts analysis. In
addition, where a statutory provision “is merely a codification of a long-standing common-
law conflict-of-laws principle,” the same principle applies (Ministers, 26 NY3d at 472).
Notably, and consistent with the legislative intent of avoiding uncertainty identified in
Ministers and IRB-Brasil, UCC 8-110 does not invite courts to conduct an open-ended
conflicts analysis—rather, it clearly identifies “the local law of the issuer’s jurisdiction” as
the governing law on the validity of a security.
Because UCC 8-110 is applicable here, any issue of the validity of a security issued
pursuant to the Governing Documents is determined by the law of the issuer’s jurisdiction.
In this case, the issuer is a Venezuelan entity, so the law of Venezuela is determinative of
the issue of validity.
However, we emphasize that generally, in every other respect, the Governing
Documents are governed by New York law. Indeed, it is important to distinguish carefully
between the validity of a security issued by a Venezuelan entity, which is governed by
Venezuelan law, and all other issues that remain governed by New York Law. Venezuelan
law applies here only as to the validity of the securities issued by a Venezuelan entity, not
as to other actions arising from or related to the transaction. Even if a security issued by a
- 14 - - 15 - No. 6
Venezuelan entity is invalid under Venezuelan law, the effect of that invalidity is
nonetheless governed by New York law (see UCC 8-202 [b] [describing remedies available
when a security is issued “with a defect going to its validity”]; cf. Korea Life Ins. Co., Ltd.
v Morgan Guar. Tr. Co. of New York, 269 F Supp 2d 424, 438 [SD NY 2003] [“(T)he
existence of illegality is to be determined by the local law of the jurisdiction where the
illegal act is done, while the effect of illegality upon the contractual relationship is to be
determined by the law of the jurisdiction which is selected under conflicts analysis”]).
Furthermore, as discussed below, “validity” under UCC 8-110 is a limited term that bears
only on the process by which a security is properly issued.
VI.
This background leads us to the issue of whether the term “validity” as used in UCC
8-110 (a) (1) could apply to Article 150 of the Venezuelan Constitution, such that a court
should analyze Article 150 and its related constitutional provisions to determine the
validity of securities issued by the Venezuelan entities in this transaction. We conclude
that, despite the limited scope of the term “validity” in UCC 8-110, determining whether
the securities issued by these Venezuelan entities are valid requires analysis of Article 150
and related provisions of the Venezuelan Constitution, because those provisions may
govern the process by which a security is “duly authorized.”
When interpreting the UCC, we look to the “language of the statute, as well as the
clear commentary on the relevant sections” (Worthy Lending LLC v New Style Contractors,
Inc., 39 NY3d 99, 103 [2022]). UCC 8-110 does not define the term “validity,” nor do
dictionary definitions further our understanding given the specialized nature of the statute
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(see Chauca v Abraham, 30 NY3d 325, 330-331 [2017] [“(W)ords of technical or special
meaning are used by the legislature, not loosely, but with regard for their established legal
significance” (internal quotation marks omitted)]). Therefore, we look to the prevailing
understanding of the term “validity” in this specialized area.
In the parlance of commercial and corporate lawyers, “the word ‘valid’ has a well-
developed meaning,” which is “that the agreement has been duly authorized by the
borrower” (Carl S. Bjerre, Annual Survey of Commercial Law: Investment Securities, 76
Bus. Law. 1371, 1375 [Fall 2021] [emphasis added]). This is consistent with the report
contained in the Bill Jacket, which makes clear that UCC 8-110 (a) (1) “refers to validity
in the sense of corporate or other authority to issue securities” (Rep of Comms at 22, Bill
Jacket, L 1997, ch 566). For example, a validity determination might involve issues such
as whether the proper corporate formalities were observed in issuing the securities and
whether the issuer had actual authority to issue those same securities (see W. Mark C.
Weidemaier & Mitu Gulati, Unlawfully-Issued Sovereign Debt, 61 Va J Int'l L 553, 568
[2021]). The “prevailing view” is that the validity of a security is governed by the law of
the jurisdiction where the issuer is organized (Rep of Comms at 22, Bill Jacket, L 1997 ch
566, comm. report at 22; see e.g. Am. Bar Assn, Third-Party Legal Opinion Report,
Including the Legal Opinion Accord, of the Section of Business Law, American Bar
Association, 47 Bus. Law. 167, 200 [Nov. 1991] [“(T)he authorization of the Transaction
and the Transaction Documents will be governed by the law of the Client’s jurisdiction of
organization—whether or not it is the law governing the Transaction Document”]).
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Legal opinions on validity generally evaluate two issues that speak to whether an
agreement was duly authorized: “(1) did the borrower have the power to enter the
agreement, and (2) did the proper body or bodies within the borrower approve[] the
agreement in the manner required—with these questions being evaluated both under the
borrower’s constitutive internal documents, such as its charter, and the external law under
which the borrower is organized, such as the jurisdiction’s statutes or constitution” (Bjerre
at 1375-1376 [emphasis added]). Notably, this second consideration includes a procedural
determination about whether “all actions or approvals by the [borrower] (e.g., by its board
of directors) and its owners (e.g., shareholders or partners) necessary (without resort to
principles of estoppel, apparent authority, waiver or the like) to bind the [borrower] under
the contract have been taken or obtained and the contract has been duly executed pursuant
thereto” (Am. Bar Assn at 200; see id. at 201; see also Bjerre at 1375 n 19).4
Validity should be carefully distinguished from two other issues. One is the issue
of whether the rights and duties created by contractual provisions are contrary to local law,
which certain commentaries refer to as “enforceability” (see 7 Hawkland § 8-110:2). In
explaining the distinction between validity and enforceability, it is “useful to characterize
validity requirements as going to the nature of the obligor [e.g., the issuer] and its internal
processes on one hand, and on the other hand enforceability requirements of general
applicability as going to the nature of the rights and obligations purportedly created,
4 While these sources do not define the exact scope of the term “validity,” it is clear that validity concerns the antecedent procedures and approvals required for an agreement to be duly authorized. - 17 - - 18 - No. 6
irrespective of the nature of the obligor and its processes” (Bjerre at 1379 [emphasis
added]). For example, statutory and constitutional provisions of the issuer’s jurisdiction
may restrict certain interest rates, mandate various contractual provisions, or prohibit fraud.
However, such provisions do not implicate the validity of a security because they do not
speak to the “procedural requirement[s]” for it to be duly authorized—i.e., the process
without which the security cannot come into being in the first place (id. at 1380). For this
reason, a court should not apply such provisions under UCC 8-110 (a) (1).
Second, validity itself should be distinguished from the consequences of validity or
invalidity. In broader commercial practice, courts generally “look to the sovereign’s law to
decide whether a loan was validly issued but look to the designated foreign law [i.e., the
law specified by contract] to determine the consequences of a violation” (Weidemaier &
Gulati at 560; cf. Restatement [Second] of Conflict of Laws § 202, Comment c [“A
distinction must here be drawn between the effect of illegality upon the validity of the
contract and the existence of illegality as such” (emphasis added)]). As to the validity of a
security, UCC 8-202 specifically addresses “the circumstances in which an issuer can and
cannot assert invalidity as a defense against purchasers” (UCC 8-110, Comment 2). Even
if a court determines that a security is invalid under the local law of the issuer’s jurisdiction,
the effects of that determination will depend on New York law.
Here, the inquiry is whether the constitutional provisions at issue could render
defective the issuer’s authority to issue the 2020 Notes or whether they merely implicate
the legality of national public interest contracts with foreign entities. We conclude that
Article 150 and its related constitutional provisions could potentially implicate validity
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because they speak to whether an entity has the power or authority to issue a security, and
relatedly, what procedures are required to exercise such authority (see generally UCC 8-
202, Official Comment 3 [explaining that limitations applicable to governmental issuers
are intended to ensure, “as a matter of public policy,” that “mere technicalit[ies]” are not
grounds for invalidating securities held by an innocent purchaser while also “requiring that
the municipality have power to issue the security”]).
Article 150 requires “approval of the National Assembly” before certain “national
public interest contract[s]” “shall be executed.” Section 9 of Article 187 states that “[i]t is
the role of the National Assembly to . . . [a]uthorize” such contracts. By their terms, these
provisions may address the procedural requirements and approvals necessary for—and
present a discrete limitation on—the authority of certain public entities to enter into
“national public interest contracts.” While defendants analogize Article 150 to a law of
general applicability—for example a law prohibiting usurious contracts—this is inapt.
Unlike a usury law, which simply prohibits certain terms of interest, Article 150
specifically references the actual authority and process required for due authorization of
national public interest contracts, which may include an issuance of securities under
Venezuelan Law (see brief for amicus curiae Kermit Roosevelt III at 5 [characterizing the
Venezuelan constitutional provisions as “specific restrictions on the authority of state
entities”]).
The official comment to UCC 8-110 reinforces our conclusion that the constitutional
provisions at issue here may speak to the validity of the 2020 Notes. That comment ties
the meaning of “validity” to the provisions in UCC 8-202, which address “the
- 19 - - 20 - No. 6
circumstances in which an issuer can and cannot assert invalidity as a defense against
purchasers” (UCC 8-110, Comment 2; see 7 Hawkland § 8-110:2 [explaining that UCC 8-
202 is “the principal Article 8 substantive rule to look to for guidance in applying the choice
of law rule in subsection 8-110 [a]”]). For its part, UCC 8-202 (b) provides that “[a]
security . . . issued with a defect going to its validity, is valid in the hands of a purchaser
for value and without notice of the particular defect unless the defect involves a violation
of a constitutional provision,” in which case “the security is valid in the hands of a
purchaser for value and without notice of the defect, other than one who takes by original
issue” (UCC 8-202 [b] [1] [emphasis added]). The same rules apply to “an issuer that is a
government or governmental subdivision, agency, or instrumentality,” but with additional
restrictions (UCC 8-202 [b] [2]).
This discussion of validity, with its reference to constitutional provisions, clarifies
that while determining a security’s validity generally involves inquiring into whether
corporate formalities were observed, it also implicates constitutional provisions of the
issuer’s jurisdiction that speak to whether a security is duly authorized. Invalidity under
UCC 8-110 (a) (1), when properly understood, does not encompass all defects, and even a
defect going to validity may not prevent the terms of the security from being enforced (see
UCC 8-202, Official Comment 3). However, invalidity under section 8-110 (a) (1) does
encompass defects bearing on whether securities were “duly authorized” at the time of their
issuance (7 Hawkland at § 8-110:2). Such defects may exist due to the failure to comply
with a specific constitutional provision that applies to the issuance of the security, much in
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the same way that a defect may exist due to the failure to comply with corporate formalities
governing the issuance of the security.
Indeed, the legislature appears to have understood that the term “validity” in UCC
8-110 is not limited strictly to compliance with corporate formalities. A report “consulted”
by the legislature (L 1997, ch 566 § 1) explained that “[t]he ‘validity of a security,’ . . . in
both Prior and Revised Article 8 refers to validity in the sense of corporate or other
authority to issue securities” and “in the sense of having been issued pursuant to
appropriate corporate or other similar action” (Rep of Comms at 22, Bill Jacket, L 1997,
ch 566 [emphasis added]). Thus, the statutory scheme of the UCC and the language of
various pertinent sections of UCC article 8, “as amplified by the Official Comments”
(Banque Worms v BankAmerica Intl., 77 NY2d 362, 373 [1991]), support the view that a
security’s validity, at the time it is issued, may be determined by reference to a qualifying
constitutional provision.
Defendants minimize “section 8-202 (b) (1)’s reference to ‘violation[s] of …
constitutional provision[s]’ ” by claiming that it “is cabined to those constitutional
provisions directly dealing with the issuance of securities” (51 F4th at 469). But this
limitation is nowhere in the text of section 8-110, section 8-202, or the official comments.
Moreover, it is not clear what “directly deal with the issuance of securities” would mean
in this context. The parties here agree that general requirements of corporate law governing
approval of transactions affect the validity of a security, even though they may apply
generally to all transactions, rather than solely to securities. The proper line, therefore,
must be drawn between constitutional provisions that determine the validity of a security
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and those that determine other issues, not between those that speak to securities by name
and those that do not. Because the constitutional provisions here may affect validity in the
sense that they render defective the issuer’s procedural authority to issue the securities in
question, they are relevant to the analysis under UCC 8-110.
VII.
This litigation has focused heavily on whether certain provisions of the Venezuelan
Constitution are relevant to the validity of securities issued by certain Venezuelan entities
under the Governing Documents. We conclude that they are. However, in light of New
York’s “status as a commercial center” (51 F4th at 460) and our previous decisions
demonstrating respect for New York choice-of-law agreements (see e.g. Ministers, 26
NY3d at 468), the application of Venezuelan law to the Governing Documents must be
narrowly confined. The exception provided by UCC 8-110 provides no opportunity for the
application of foreign laws going to the enforceability of a security, nor does it affect the
adjudication of any question under the contract other than whether a security issued by a
foreign entity is valid when issued.
None of this is to say that plaintiffs will ultimately be victorious. The question that
we have answered is merely whether UCC 8-110 (a) (1) requires courts to consider if the
2020 Notes were issued with defects going to their validity under Article 150 and other
related provisions of Venezuela’s Constitution. The question remains whether, under those
constitutional provisions, failure to receive authorization from the National Assembly prior
to issuing the 2020 Notes means that the notes were invalid under the law of Venezuela at
the time of their issuance. That, however, is an issue that we must leave for the federal
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courts to determine. Finally, even if it is determined that the securities were “issued with
a defect going to [their] validity” under Venezuelan law, New York law nonetheless
governs the consequences of that defect (see UCC 8-202 [b]).
Accordingly, the first certified question, as reformulated, should be answered in
accordance with this opinion and the remaining questions not answered.
Following certification of questions by the United States Court of Appeals for the Second Circuit and acceptance of the questions by this Court pursuant to section 500.27 of this Court's Rules of Practice, and after hearing argument by counsel for the parties and consideration of the briefs and record submitted, first certified question, as reformulated, answered in accordance with the opinion herein and remaining questions not answered. Opinion by Judge Troutman. Chief Judge Wilson and Judges Rivera, Garcia, Singas, Cannataro and Curran concur. Judge Halligan took no part.
Decided February 20, 2024
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