Chesapeake Missed Chance to Clarify Call Date, Judge Says

Chesapeake Energy Corp. had “any number of ways” it could have improved the language of a $1.3 billion bond contract to clarify a deadline for early redemption at par and avoid market confusion, a judge said.

The failure to make such changes before issuing the 6.775 percent notes due in March 2019 led to the natural-gas producer’s lawsuit against Bank of New York Mellon Corp., the trustee for the notes, U.S. District Judge Paul Engelmayer said today in New York. Evidence that Chesapeake presented during a three-day trial about the deadline wasn’t available to investors who bought the notes earlier, he said.

Had the changes been made, “it would have succinctly cleared up this whole thing,” Engelmayer said. “What good does it do for the downstream purchasers” of the notes who “don’t have access to this evidence?”

Chesapeake, the second-biggest producer of natural gas in the U.S., sued BNY Mellon last month after the bank said the company missed the March 15 deadline to call the notes early at 100 cents on the dollar. Chesapeake argues it was the deadline for sending a notice of early redemption to investors. At stake is Oklahoma City-based Chesapeake’s bid to refinance the debt and save about $100 million by tapping lower interest rates.

The judge, who is presiding over the case on an emergency basis, has said he intends to rule by May 9, less than a week before the early call is scheduled to be formally executed.

Security’s ‘Ambiguity’

“To the extent this contract is made available to third-party purchasers, then those investors are buying a security with an ambiguity,” Chesapeake’s lawyer, Richard Ziegler, said during closing arguments. “These are sophisticated investors and they all have counsel.”

The bonds climbed 1.44 cents to 107.3 cents on the dollar as of 2:53 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Under questioning from Engelmayer, Ziegler said there was no “rational, economic benefit” for Chesapeake, which issued the notes in February 2012, to define the deadline the way BNY Mellon has. In the contract, the word “redeem” is used for a process that starts with a notice, he said.

Steven Bierman, an attorney for BNY Mellon, said it was the trustee’s job to interpret the language of the contract using its clear meaning, and that Chesapeake was “trivializing” the bank’s role.

“The marketplace and Bank of New York Mellon had every right to take this language on its face,” Bierman said. Chesapeake is making “linguistic gyrations” to change the meaning of a deadline that appeared in the company’s regulatory filings, its website, and in notices to investors, he said.

Deadline Dispute

Chesapeake argued that the deadline -- listed in the indenture paperwork for the notes -- was for notifying investors of the early call, and that it had another 30 days to complete the transaction. New York-based BNY Mellon said the call had to be announced in February and completed by March 15.

Engelmayer said last week that Chesapeake’s employees’ confusion over the deadline will weigh on his decision after Bank of New York Mellon provided evidence that some people at the gas company didn’t understand the meaning of the deadline once the early redemption started being considered in January.

Elliot Chambers, Chesapeake’s assistant treasurer and vice president of finance, wrote as recently as Jan. 9 that the company would need to complete the early call by March 15 to do so at par, according to internal e-mails submitted in the case. He testified at the trial last week, saying his earlier views on the deadline were mistaken.

Bierman said Chambers’ initial view was “damning” and that the executive, who helped approve contract language about the early redemption, had been involved in the debt issue from the beginning.

“Mr. Chambers was all over that process,” Bierman said. Chesapeake “has done its best to marginalize him, but he really is key.”

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).

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