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Chesapeake Executive Testifies to Change of Mind on Notes

A Chesapeake Energy Corp. (CHK) executive said at a trial in New York that as recently as Jan. 9 he thought the natural-gas producer would need to complete an early call of $1.3 billion in notes by March 15 to do so at par.

The testimony today by Elliot Chambers, Chesapeake’s assistant treasurer and vice president of finance, conflicted with the company’s main argument in its lawsuit against the notes’ trustee, Bank of New York Mellon Corp. The energy producer sued over claims it had until the deadline in March to notify investors of a planned early redemption at 100 cents on the dollar, and another 30 days to complete the deal.

“I take it you changed your view,” Benjamin Nagin, one of Bank of New York Mellon’s lawyers, said in his cross-examination of Chambers in federal court in Manhattan.

“Yes,” said Chambers, who in February 2012 helped sign off on the indenture paperwork for the 6.775 percent notes due March 2019. Chambers added that his earlier opinion, outlined in several e-mails when the early call was being contemplated, was an “incorrect understanding.”

Chesapeake, based in Oklahoma City, sued BNY Mellon last month after the bank said the second-biggest U.S. gas producer’s planned notice of early redemption was a month late and conflicted with investors’ expectations. At stake is Chesapeake’s bid to refinance the debt and save about $100 million by getting lower interest rates.

U.S. District Judge Paul Engelmayer, who is overseeing the case on an emergency basis, has said he’ll aim to rule on the three-day trial by May 9, less than a week before the early call is scheduled to be formally executed.

Chesapeake E-Mail

BNY Mellon called Chambers as a witness after finding the e-mails in a pretrial exchange of documentary evidence between the two sides.

The communications may assist the bank as it seeks to convince the judge that Chesapeake, when it was drafting the notes’ indenture, intended the March 15 deadline to be the final date for an early call to be completed.

Chambers testified today that he changed his view on the deadline after communicating with Chesapeake’s lawyers at Bracewell & Giuliani LLP, which advised Chesapeake on the notes. He also reviewed the indenture paperwork in more detail and spoke with other Chesapeake employees, he said.

Under questioning from Nagin, Chambers said he thought to “redeem” meant to exchange cash for notes. The indenture says the early redemption at par must take place between Nov. 15, 2012 and March 15, 2013.

Investor’s Influence

Bank of New York Mellon initially agreed with Chesapeake in February that the early redemption would meet the deadline. The trustee changed its position after investor River Birch Capital LLC, which bought some notes in February, argued Chesapeake had started the process too late, Chesapeake said.

Chesapeake made the early call after the lawsuit was filed because Engelmayer said he didn’t think the investors had a strong argument for a demand they made -- that the gas company should make a “make-whole payment” of $400 million for the notes if Chesapeake lost its lawsuit over the deadline.

Chesapeake said it will cancel the early call if it loses the case, and BNY Mellon later dropped that argument.

Steven Bierman, an attorney for BNY Mellon, said in his opening statement yesterday that under New York law, any ambiguity in a contract should be interpreted against the party that drafted it and not against investors who weren’t represented in negotiations. Chesapeake’s lawyer, Stephen Ascher, said the bank ignored the obvious meaning of the date.

‘Ambiguous’ Language

Engelmayer in earlier hearings has called the language in the indenture “ambiguous” and said he needed to see evidence and hear testimony from people who worked on negotiations for the notes and helped draft the indenture about how the language was chosen to determine the meaning of the deadline.

Last month, River Birch held $16.7 million of the securities, some of which it bought Feb. 15 after it thought Chesapeake had missed the window to redeem the notes at par, James Seery Jr., a lawyer at the hedge fund, said in a March 12 letter to the court.

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).

To contact the reporter on this story: Erik Larson in federal court 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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