PDVSA's Debt Restructuring: The Chapter 15 Option

Mitu Gulati and Mark Weidemaier

This past week, Bob Rasmussen of USC Law gave a talk at Duke on “Puerto Rico and the Netherworld of Sovereign Debt Restructuring.” Luckily for us, he also took a detour to UNC to talk to our International Debt students about whether PDVSA might use Chapter 15 of the Bankruptcy Code to restructure its debts. Our foil for that discussion was a recent paper by Rich Cooper (Cleary Gottlieb) and Mark Walker (Millstein & Co.) proposing Chapter 15 as a possible solution to PDVSA’s woes. This is one of a number of extant restructuring proposals for Venezuela and PDVSA; Lee Buchheit (working with Mitu) has published several others (here, here, and here). The Cooper and Walker proposal is the only one to explore the Chapter 15 possibility in detail, and it thoughtfully makes the case for that restructuring option. In very condensed form, the proposal is for Venezuela to pass a new bankruptcy law governing PDVSA and other public sector entities, for PDVSA to restructure its debts using that process, and then for PDVSA to ask courts in the U.S. to recognize that bankruptcy under Chapter 15.

One way to frame an analysis of this proposal is to ask what Chapter 15 offers that other restructuring tools—like Exit Consents—do not. Cooper and Walker detail a number of advantages, but it seems to us that the key ones are a stay of litigation by creditors and the ability to bind dissenting creditors (including non-bond creditors). We suspect it would be fairly easy for PDVSA to obtain a temporary stay of creditor litigation, as courts have discretion to stay creditor enforcement actions while working out preliminary matters in a Chapter 15 case. But a relatively short stay, while valuable, probably isn’t worth enough to justify the effort of enacting a new bankruptcy law. For a longer stay, and to give effect to a plan of reorganization, PDVSA would have to satisfy the eligibility criteria for Chapter 15, and the Venezuelan bankruptcy law would have to earn “recognition.”

In our Chapter 15 session with Bob, several fundamental questions surfaced, only one of which is squarely addressed by the Cooper and Walker proposal. One question has to do with political feasibility. To pass muster under Chapter 15, Venezuela’s new bankruptcy law will have to be administered by a credibly independent institution in that country. PDVSA will also have to submit to a certain amount of oversight by bankruptcy courts in the U.S. and elsewhere. It isn’t clear to us that any Venezuelan government—and certainly not the present one—will accept these costs. Cooper and Walker allude to this, and they seem to envision a new government implementing the plan. At least in the near term, however, it seems a major barrier. 

A second question, which they do discuss at length, concerns PDVSA’s eligibility for Chapter 15 relief. PDVSA can’t reorganize under Chapter 11, because an instrumentality of a foreign government is not a “debtor” eligible to use that Chapter. A relatively recent case from the Second Circuit (In re Barnet, 737 F.3d 238) implies that the definitions in Chapter 11 might control eligibility in Chapter 15 as well, but Cooper and Walker lay out the counter-arguments in some detail.

Viewed purely as a question of statutory interpretation, the eligibility question might be a toss-up. But we do wonder whether U.S. courts will be disinclined to accept PDVSA’s arguments. That’s true on eligibility, but especially on questions of recognition. It’s one thing for a US bankruptcy court to recognize a well-established foreign bankruptcy regime, even one that departs in some ways from U.S. practice. But a brand new bankruptcy regime, with no track record at all (much less a track record of independence), enacted to benefit an entity not eligible to reorganize using U.S. bankruptcy law? That’s a big ask. And what if the U.S. government opposes recognition, if only to protect U.S. bondholders from having restructuring terms imposed against their will? (Recall that PDVSA’s bonds give each bondholder the right to reject a proposed modification to payment terms.) We suspect a bankruptcy judge would take that opposition very seriously.  

Recognizing these concerns, Cooper and Walker propose an alternative. This route is more complicated. The first step involves the use of Exit Consents (and Mitu loves Exit Consents!). PDVSA would secure the approval of a majority of bondholders to change the governing law of the bonds from New York law to English law. Then, PDVSA would seek to reorganize through a so-called “scheme of arrangement,” in which 75% of creditors can impose restructuring terms on dissenters. Finally, PDVSA could seek recognition of this proceeding in the U.S. But of course, the threshold question of eligibility remains. Moreover, the use of Exit Consents will trigger scrutiny, both under New York and English law. PDVSA would have to explain how it can permissibly use this technique to accomplish the very thing it promised not to do in the bonds: impair a holder’s right to receive payment and to bring suit to enforce that right.

We have gone on long enough. The short version of our critique is simply that the Walker and Cooper proposal leaves us wanting more. It’s a provocative proposal by two extremely experienced restructuring professionals. But we remain skeptical that Venezuela can use such maneuvers to effectively cramdown bondholders. And while the issues are somewhat different, we are left with similar questions about other creditors, like those pursuing alter ego claims against PDVSA based on expropriation by Venezuela.