BNY Mellon Criticized in $400 Million Chesapeake Fight

Bank of New York Mellon Corp. and a group of noteholders were panned by a judge over their bid to force Chesapeake Energy Corp. (CHK) to pay $400 million in interest if it loses a lawsuit to redeem $1.3 billion in notes early at par.

BNY Mellon, the trustee for the notes, and investors whose holdings total about $250 million seek a court ruling that Chesapeake missed a deadline to redeem the notes at 100 cents and would be obliged to call the bonds at a higher “make whole” price if it issues an early-redemption notice this week.

The bank and noteholders are essentially “holding a sword” over Chesapeake in a way that could be viewed as “trickery,” U.S. District Judge Paul Engelmayer said at a hearing yesterday in Manhattan.

If Engelmayer rules in favor of Chesapeake, the second- biggest natural gas producer in the U.S. will tell bondholders by the following day that it plans to redeem the 6.775 percent notes at par six years before they mature. If the company loses, it won’t issue the notice and won’t be at risk of paying the $400 million in make-whole interest sought by investors. The judge said he’ll issue a decision at 3 p.m. tomorrow.

Final Date

Chesapeake, which sued the bank last week, argued that March 15 is the final date it can issue the formal notice of early redemption and avoid the make-whole provision, even if the call is completed after that date; BNY Mellon and the investor group said the process would need to be completed by the deadline, and thus it’s too late to issue the notice at par.

At yesterday’s hearing, both sides quoted from different parts of the bond issue’s indenture paperwork to back their interpretation of the deadline.

BNY Mellon (BK) is supported in the case by the group of noteholders, which includes hedge funds. The judge formally allowed them to intervene in the case at yesterday’s hearing.

The dispute over the meaning of the deadline could theoretically be dealt with separately from a make-whole penalty because Chesapeake made it clear it has no intention of redeeming the notes unless it can do so at par, the judge said.

The notes, issued in February 2012 and due March 2019, were pushed by traders to a record 105.9 cents on the dollar the day the lawsuit was filed, a signal they may believe the Oklahoma City-based company would have to pay a premium to call the debt.

No Intention

The intervening investors include Archer Capital Management LP, Ares Management LLC, Aurelius Capital Management LP, Carlson Capital LP, Cetus Capital LLC, Latigo Partners LLP, Monarch Alternative Capital LP, P. Schoenfeld Asset Management LP, River Birch Capital LLC and Taconic Capital Advisors LP.

Richard Ziegler, Chesapeake’s lawyer with Jenner & Block LLP in New York, said the dispute over the make-whole provision should be moot since the company has no intention of issuing the notice to noteholders if it fails to win a preliminary injunction protecting it from such a penalty.

Ziegler said at yesterday’s hearing that the harm to Chesapeake in the absence of such an injunction would be greater than the harm to investors, who are accustomed to managing, buying and selling notes based on a wide range of events that are common in the marketplace.

The noteholders “will get an incredible windfall” from a make-whole payment, which they don’t deserve, Ziegler said. The noteholders “are chafing at the bit” for Chesapeake’s early redemption notice to inadvertently “trigger a make-whole payment,” he said.

Early Redemption

Chesapeake’s complaint quoted the indenture paperwork, which states “the company shall be permitted to exercise its option to redeem the notes” so long as it gives the notice of redemption during “the special early redemption period” from Nov. 15, 2012 to March 15.

The bank and the noteholders filed papers citing different portions of the paperwork that say any early redemption after March 15 will trigger a make-whole payment. They also said Chesapeake, when drafting the paperwork, omitted language that would have allowed the type of early redemption it now seeks.

The group of noteholders are entitled to the make-whole provision because it’s included in the “plain language” of the indemnity, said Steven Bierman, a lawyer for the investors. The group shouldn’t be punished as a result of Chesapeake failing to issue the early redemption notice on time, he said.

“Chesapeake is trying to shift the risk created by a problem of its own making onto the marketplace and noteholders,” Bierman said. While the company could have avoided the problem by issuing the notice earlier, “they failed to, or they forgot to -- whatever -- they didn’t do it.”

BNY Mellon and the intervenors “desire to take advantage of the ambiguity” in the contract, Engelmayer said. “That’s why we’re here, isn’t it?”

Full Trial

The judge questioned the idea that investors would be harmed by a ruling in Chesapeake’s favor, which would allow a full trial over the meaning of the deadline and possibly allow the early redemption by the middle of May.

“The last thing the trustee is trying to do is have a windfall,” BNY Mellon’s lawyer, Paul Weinstein, said at the hearing.

Weinstein rejected the judge’s suggestion that the situation could leave the New York-based bank open to a potential claim of gross negligence for allowing the dispute to develop between Chesapeake and the intervenors.

BNY Mellon initially supported Chesapeake’s plan when the energy company first discussed early redemption with the bank on Feb. 20, according to the complaint. Two days later, the bank changed its mind, Chesapeake said.

Both sides may seek to appeal the judge’s eventual order.

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

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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