Litigation Coverage: Citgo Sale Approval Hearing to Begin Sept. 15, Before Anticipated Ruling on PDVSA Bondholders’ Pledge; Winning Bidder to Be Announced No Later Than Aug. 29

At a hearing today, Judge Leonard Stark reset the final hearing on approval of the winning bid for PDVSA’s shares in Citgo owner PDVH to begin Sept. 15, while reserving additional hearing days beginning Oct. 20 for further proceedings – including any proceedings necessary to address Judge Katherine Failla’s anticipated decision on the validity of the PDVSA 2020 bondholders’ disputed pledge on PDVH’s Citgo shares, which is expected by Sept. 30.

Final bids are due this Friday, Aug. 22, at 11:59 p.m. ET, though parties can submit additional bids after that date by filing their offer publicly on the docket. Judge Stark also directed the special master overseeing the sale to announce by Monday, Aug. 25, whether he has received an offer he deems superior to Dalinar Energy’s $7.4 billion bid. If so, then Dalinar would have three days, through Aug. 28, to match such a bid. By Aug. 29, the special master must file his final recommendation for the winning bid to be considered at the Sept. 15 hearing.

For now, the bidding appears to be a contest between the Gold Reserve affiliate, whose bid the special master recommended on July 2, and Elliott affiliate Amber Energy, which submitted an unsolicited $8.8 billion bid (including a $2.9 billion settlement with PDVSA bondholders) on Aug. 7 – though two other bidders appear to remain interested, according to comments by counsel today.

The Dalinar bid would provide $1.5 billion more to holders of judgments against the Republic of Venezuela, but the Amber bid includes a settlement with the PDVSA bondholders which would eliminate the risk that the bondholders might succeed in their efforts to prevent closing on the Dalinar bid. The bondholders maintain that Dalinar’s financing would improperly violate or prime their disputed pledge of 50.1% of PDVH’s shares in Citgo Holding, although Dalinar disagrees.

At today’s hearing, Gold Reserve counsel Matthew H. Kirtland of Norton Rose argued that the special master cannot select the new Elliott/Amber bid under the terms of the court’s Jan. 27 sale process order because it would provide less value to Venezuela judgment creditors than Dalinar’s bid. According to Kirtland, the order requires that the special master consider only price, and not closing certainty, at this stage of the process.

Chase A. Bentley of Weil, counsel for the special master, responded that the special master remains free to consider closing certainty when determining which bid to recommend, and he accused Gold Reserve of attempting to hold the process hostage. Judge Stark did not resolve the issue but indicated that briefing on the dispute, in whatever form it arises, would have to be complete by Sept. 11.

Kirtland, for Gold Reserve, also pushed Judge Stark not to set the sale hearing until after Judge Failla rules on the validity of the PDVSA bondholders’ pledge. According to Kirtland, Judge Failla’s ruling is a critical “one-way door”: If she invalidates the bondholders’ pledge, then any litigation risk from the bondholders disappears, because the bondholders cannot secure an injunction preventing closing on Dalinar’s bid by invoking an invalid pledge.

Nathan P. Eimer of Eimer Stahl, counsel for PDVH and Citgo, argued that even if Judge Failla’s decision can be appealed and does not fully and finally resolve the bondholders’ claims, the result could have an effect on bidding. According to Eimer, bidders other than Dalinar have reserved approximately $2 billion each to address the bondholders’ claims, and even Dalinar has secured $1.8 billion in financing from JPMorgan to deal with the bondholders.

If Judge Failla invalidates the bondholders’ pledge, Eimer continued, that would change the “litigation risk analysis,” freeing up at least a portion of those set-asides for Venezuela judgment creditors. Eimer pointed out that “we haven’t heard a word” about Gramercy’s alter ego claims, which were once seen by even Amber Energy as a major obstacle to the sale, since Judge Jed Rakoff’s decision rejecting those claims – even though Judge Rakoff’s decision has been appealed.

However, Judge Stark said he does not feel that waiting for Judge Failla’s decision to start the sale hearing makes sense because potential post-decision litigation and appeals mean the ruling will not fully resolve the issue. “I’m going to have to deal with all possible permutations” related to the PDVSA bondholders “almost no matter what Judge Failla rules,” the judge explained. But, as noted above, Judge Stark did reserve two days in late October to consider Judge Failla’s decision or any other issues not covered in September.

Judge Stark asked Kirtland whether Dalinar would walk from its bid if Judge Failla validates the bondholders’ pledge. Kirtland called the possibility “absurd” and said the bid is “existential” for Gold Reserve, which would lose its $50 million deposit and the $50 million to $75 million it has spent to secure financing and press its bid. If Judge Failla validates the bondholders pledge, that would not invalidate Dalinar’s financing, and “we would still close,” Kirtland concluded.