*

Judge Failla rules PDVSA's 2020 bonds valid under

Venezuelan law

*

Citgo's assets at risk due to PDVSA bond default

*

Delaware auction for Citgo parent shares temporarily

suspended

for review

(Adds background in paragraphs 3-6, 8, 10; adds details on

Delaware auction in paragraphs 7, 9)

By Luc Cohen and Marianna Parraga

NEW YORK, Sept 18 (Reuters) - A U.S. judge upheld the

validity of Venezuelan state oil company PDVSA's 2020 bonds on

Thursday, prompting the temporary suspension of a separate

auction for shares in the parent of Venezuela-owned U.S. refiner

Citgo.

The bonds are secured by a majority stake in Citgo,

which is ultimately owned by Caracas-headquartered PDVSA. The

company defaulted on the bonds in 2019, putting the refiner at

risk of seizure by creditors.

Bondholders and companies that were expropriated in

Venezuela have clashed for years in U.S. courts in pursuit of

the country's overseas assets, especially Houston-based refiner

Citgo Petroleum, valued at some $13 billion.

Venezuela defaulted on those and other bonds issued by the

country and PDVSA. Several companies whose Venezuelan assets

were expropriated by the government of late President Hugo

Chavez are seeking to seize the country's overseas assets, after

winning arbitration cases.

After Washington sanctioned PDVSA in 2019 as part of its

push to oust Venezuelan President Nicolas Maduro, Citgo severed

ties with PDVSA and its control was taken over by Venezuela's

political opposition.

The opposition has been seeking to protect Citgo and

other assets from creditors and companies seeking redress for

defaulted debt or expropriated assets. The opposition had argued

that the 2020 bonds were not properly issued under Venezuelan

law.

On Thursday, U.S. District Judge Katherine Polk Failla in

Manhattan ruled that the bonds were indeed properly issued. She

had previously declared the bonds valid in 2020, but an appeals

court later ordered further review.

After Failla's ruling, a separate auction for shares in

Citgo's parent company before U.S. District Judge Leonard Stark

in Delaware was suspended briefly to allow the court to review

the impact of the New York judge's decision.

The auction, in which 15 companies and bondholders are

pursuing Citgo's assets, is expected to determine the future of

the seventh largest U.S. oil refiner. Bidders include a

subsidiary of miner Gold Reserve ( GDRZF ) and Amber Energy, an

affiliate of Elliott Investment Management.

Lawyers defending Venezuela had said earlier this week

in Stark's courtroom that they could appeal if the 2020 bonds'

validity was reaffirmed. After Failla's ruling, boards

supervising Citgo set up an urgent meeting with their lawyers to

plan action, a source close to the preparations said.

Sale proceedings before Stark are in their fourth day.

The judge has not yet made key decisions on pending procedural

issues or confirmed the auction's winner.