Chesapeake faces April trial over $1.3 billion bond call

Chesapeake Energy Corp. (CHK) and Bank of New York Mellon Corp. are scheduled to face off at trial beginning April 23 over the gas producer’s disputed claim it met a deadline to redeem $1.3 billion in bonds early at par, or 100 cents on the dollar.

U.S. District Judge Paul Engelmayer in Manhattan yesterday set the trial two weeks earlier than the companies had requested, saying either side should have time to appeal his eventual decision before the redemption of the notes is formally executed on about May 13 or May 14.
Chesapeake, the second-biggest natural gas producer in the U.S., issued the early redemption notice on March 15. A week earlier, the Oklahoma City-based company sued BNY Mellon (BK), the indenture trustee for the notes, seeking a court order that it had until that date to issue the notice without paying $400 million in extra “make whole” interest.

BNY Mellon, the world’s largest custody bank, argued that the extra payment was required because the call wasn’t completed by March 15. Steven Bierman, the lawyer for a group of investors in the case, said he would continue the demand for the make- whole payment in court.
The make-whole dispute “is important for the industry,” Bierman said at yesterday’s hearing. Chesapeake’s stance goes against the “unambiguous language” of the indenture for the notes, he said.

Bierman objected to Engelmayer’s attempt to focus the case only on the dispute over the deadline itself, saying he wanted to ask Chesapeake for evidence related to the make-whole demand as well.

Noteholder Deadline

Investors holding $250 million in the 6.775 percent notes due March 2019 won court approval last week to intervene in the case and were also involved in agreeing to the schedule. Engelmayer said any other noteholders who want to be involved in the case should make themselves known to the court by March 22.

The day before Chesapeake made the early call, Engelmayer denied an injunction sought by the company that would have prevented BNY Mellon and the investor group from treating the call as a ‘make-whole early redemption if the judge later ruled the call was made too late to be at par.

Chesapeake issued the notice anyway, because Engelmayer ruled that even though he was denying the injunction for legal reasons, the bank trustee and the investors were “overwhelmingly” likely to lose if they took the make-whole demand to trial. The trial should focus on the deadline instead, the judge said.

BNY Mellon’s Change

BNY Mellon, based in New York, triggered the lawsuit after it initially agreed with Chesapeake on the deadline in February and then changed its position when noteholder River Birch Capital LLC objected.

Engelmayer, in his March 14 ruling, said the contract was ambiguous and he would need to see evidence about how it was drafted before deciding at a trial which side is correct.

The early redemption could still be scrapped within two months if Chesapeake was wrong about the deadline. Engelmayer said the noteholders appear to have a better argument based on the early evidence he’s seen.

The group of investors involved in the case also includes Archer Capital Management LP, Ares Management LLC, Aurelius Capital Management LP, Carlson Capital LP, Cetus Capital LLC, Latigo Partners LLP, Monarch Alternative Capital LP, Schoenfeld Asset Management LP and Taconic Capital Advisors LP.

The case is Chesapeake Energy Corp. v. Bank of New York Mellon Trust Co., 13-cv-01582, U.S. District Court, Southern District of New York (Manhattan).