Chesapeake Assails BNY ‘Incoherent’ Reading of Bond Terms

A Chesapeake Energy Corp. lawyer attacked Bank of New York Mellon Corp.’s assertion that the energy company waited too long to redeem $1.3 billion in notes early at par.

Chesapeake sued BNY Mellon, the bonds’ issuing trustee, last month in federal court in New York after the bank said the gas producer’s planned notice of early redemption, which it sent to investors on March 15, would miss a deadline in the notes’ indenture paperwork allowing it to call the bonds six years early at 100 cents on the dollar. BNY Mellon said the redemption had to be completed by that date, with notification to investors a month earlier.

“Like Caesar, Chesapeake was forewarned that March 15 was a drop-dead date,” the lawyer, Stephen Ascher, said today in his opening statement in a nonjury trial of the dispute. “BNY Mellon said no, beware the Ides of February.”

Chesapeake, the second-biggest natural-gas producer in the U.S., has said it would pay about $400 million in interest over the life of the 6.775 percent notes due March 2019. At stake is the Oklahoma City-based company’s bid to refinance the debt and save about $100 million by tapping 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.

River Birch

Chesapeake on April 11 lost a pretrial request for BNY Mellon and investor River Birch Capital LLC, which initiated the challenge, to hand over e-mails showing the motive behind the bid to block the notes’ early redemption.

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 River Birch 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.

Indenture Language

Chesapeake contends the March 15 deadline stated in the indenture was for the notice of early redemption to be sent to noteholders; BNY Mellon claims that the call should have been formally completed by that date, and that the notice should have been sent to investors a month earlier on Feb. 13. Both sides argue the language in the indenture documents backs their respective interpretations of the March 15 deadline.

“BNY’s interpretation is not only unreasonable, it is incoherent,” Ascher said today.

Steven Bierman, an attorney for BNY Mellon, said 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.

“March 15 is a bright line between redeeming the notes at par and redeeming at the make-whole price,” Bierman said. Chesapeake’s view “is completely unsupportable,” he said.

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.

CFO Testimony

Employees from the law firm Bracewell & Giuliani LLP, which advised Chesapeake on the notes, and Morgan Stanley, which was an underwriter, will testify at the trial, as will Chesapeake Chief Financial Officer Domenic Dell’Osso, Richard Ziegler, the company’s lawyer, said in a court filing on April 21.

The group “will testify that the special early redemption provision includes an unusual sentence designed to give Chesapeake the right to send notice until March 15, 2013,” the company said in the filing. “Conversely, none of the drafters or negotiators -- not one -- will testify that he intended Chesapeake’s option to expire if Chesapeake did not give notice by February 13.”

The judge has said he was particularly interested in communications between Chesapeake and three Bracewell & Giuliani lawyers as the gas company sought opinions on the meaning of the deadline. The judge reviewed the e-mails in private to determine whether they should be used in the case.

Hedge Fund

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

Bierman said today that investors were under the impression the deadline was in February, bolstering BNY Mellon’s view that its interpretation is the intended one.

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).