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Oliver L Campbell : The Bandagro bonds saga


Venezuelan governments have never been too successful with their state banks and the Banco de Desarrollo Agropecuario (Bandagro) was no exception, The farmers were quick to take up the loans but slow to pay them back--if they ever did. Though the bank went bust in 1980, it has not been forgotten because of the ongoing saga of the of the zero-coupon, bearer promissory notes the bank issued--or did not issue--at that time.

That truth is stranger than fiction is borne out by this case. A Panamanian company, Gruppo Triad, bought two of the promissory notes with a face value of $50 million each in 2001 and demanded their payment. There was some doubt about the validity of the notes so the Venezuela Attorney General conducted an investigation and, in a report some 40 pages long, in 2003 she duly confirmed their validity. Based on this assurance, Skye Ventures, a company from Columbus Ohio, bought the two notes from Gruppo Triad and presented them for payment. To its surprise, payment was refused because the notes were stated to be forgeries--it seems the Attorney General had reversed her previous opinion in a period of two months.

Skye Ventures filed a claim for payment in the federal district court of Columbus since when the lawyers for the company and the Bolivarian Republic of Venezuela have had a field day.

The legal process so far is worth looking at. In January 2005, Venezuela continued to assert the notes were forgeries, but filed a motion for dismissal of the case on two grounds a) lack of jurisdiction because of sovereign immunity, and b) forum non conveniens (an unsuitable court). The latter gives the court discretion to decline to hear a case where 1) there is no good reason for the case to be brought there or 2) where it would cause hardship for the defendants or witnesses. But there must be an alternative forum available for this doctrine to apply.

In February 2009, the district court held that Venezuela was not immune from jurisdiction as the case was one of commercial activity which is a known exception, and that the doctrine of forum non conveniens was not applicable.

But the most legal important point was raised in July 2007 when Venezuela told the district court that the Venezuelan Supreme Court had made a decision that affected a relevant aspect of this case. It had " issued an "interpretative opinion," as permitted under the Venezuelan Constitution, declaring that Attorney General opinions of the kind issued in 2003 and relied upon by Skye are not final and binding determinations of the rights of private claimants, but are “merely consultative” opinions “incapable of creating subjective rights on the part of private individuals.

To you and me it may seem strange you cannot rely on the Attorney General, the chief Law Officer, to give an opinion that is definitive, but that is what the Supreme Court ruled and that is what has cut the ground from Skye Ventures' feet. The company had relied on the argument that, following the Attorney General's ruling on the validity of the notes, Venezuela was estopped from subsequently claiming they were invalid. In its simplest form, estoppel means you cannot assert something one moment, which another relies on, and then contradict it afterwards without creating legal consequences.

Because of the Supreme Court's decision, Skye Ventures argued, in both the district and circuit courts, that it would not be allowed to litigate its case in a Venezuelan court and, therefore, Venezuela's courts cannot provide “an available and adequate alternative forum” for any litigation there. The district court accepted this argument, but the circuit court decided there was nothing in the Supreme Court's decision that precluded litigation in Venezuela. It went on to say " A forum is not unavailable merely because the law applied in that forum is less favourable to a plaintiff than the law of the plaintiff's chosen forum." I take it this is a veiled reference to the doctrine of estoppel which applies in Common Law countries but probably not Venezuela.

The circuit court remanded the case back to the district court for further consideration of whether the doctrine of forum non conveniens applies. It affirmed the district court's judgement as regards the lack of sovereign immunity, but reversed its decision on forum non conveniens pending further proceedings.

There are several questions which need an answer:

1) Are there more notes in circulation and who holds them? The face value of the promissory notes in this case is only $100 million.

2) Why did Gruppo Triad and Skye Ventures buy them? Rumours the notes were forgeries date back to 1998. Did they acquire them at a bargain price not worrying about their validity? Or did they place absolute trust in the Attorney General's opinion ?

3) What made the Attorney General reverse her decision on the validity of the notes in the space of just a few weeks?

4) Was it not possible, applying forensic science, to determine if the notes were forgeries or not? The CEO of Bandagro declared his signature on the notes had been forged

The international press went overboard reporting Venezuela had lost a case with a potential payout of $8 billion to the bond holders. This made good copy but the facts are that no award has been made and the ball is back in the district court to reconsider the forum non conveniens question. Skye Ventures will not be happy with the circuit court's decision on the latter, and it certainly will not relish litigation in Venezuelan where it believes the Supreme Court's decision has undermined its argument of estoppel and prejudiced the outcome.

Will the circuit court decide the bonds were forgeries and so Venezuela has no obligation to pay those who hold them? Or will it decide that the Attorney General's original opinion that the bonds were valid means holders who bought them on that understanding are entitled to be paid even if the bonds are forgeries? Don't miss the next episode of this exciting drama!

Oliver L Campbell , MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.

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Petroleumworld News 01/14/2011

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