Chesapeake Energy Corp. v. Bank of N.Y. Mellon Trust Co.

• Decision Date: 08 May 2013
• Docket Number: No. 13 Civ. 1582(PAE).,13 Civ. 1582(PAE).
• Citation: 957 F.Supp.2d 316
• Parties: CHESAPEAKE ENERGY CORPORATION, Plaintiff, v. The BANK OF NEW YORK MELLON TRUST COMPANY, N.A., Defendant.
• Court: U.S. District Court — Southern District of New York

957 F.Supp.2d 316

CHESAPEAKE ENERGY CORPORATION, Plaintiff,

v.The BANK OF NEW YORK MELLON TRUST COMPANY, N.A., Defendant.

No. 13 Civ. 1582(PAE).

United States District Court,

S.D. New York.

May 8, 2013.

Ali Malik Arain, Anne Cortina Perry, Anthony Scott Barkow, Michael W. Ross, Prashant Yerramalli, Richard Ferdinand Ziegler, Stephen Louis Ascher, Tobias Charles Berkman, Jenner & Block LLP, New York, NY, for Plaintiff.

Paul Terry Weinstein, Mordechai Geisler, Tyler J. Kandel, Emmet, Marvin & Martin, LLP, Steven M. Bierman, Alex Rafael Rovira, Benjamin Robert Nagin, James Daniel Arden, Kevin Christopher Hartzell, Sidley Austin LLP, Allan Noel Taffet, Keith Evan Blackman, Duval & Stachenfeld LLP, New York, NY, for Defendant.

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge.

This case is about whether a corporation made, or missed, the deadline to exercise its right to redeem its outstanding notes early, on highly favorable terms. On March 15, 2013, plaintiff Chesapeake Energy Corporation (“Chesapeake”) issued a notice to redeem approximately $1.3 billion in notes due in 2019 that it had issued in 2012. Chesapeake's notice stated that it was redeeming these “2019 Notes” at par value plus interest. The notice called for the notes to be redeemed on May 13, 2013 ( i.e., next Monday). Chesapeake's view is that, under the Supplemental Indenture governing the notes, it had until March 15, 2013, to issue a notice of redemption on these terms. However, defendant Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”), the indenture trustee of those notes, representing the interests of the noteholders, takes a different view of the applicable deadline. BNY Mellon contends that, under the Supplemental Indenture, Chesapeake's deadline to issue a notice of early redemption was February 13, 2013. BNY Mellon therefore contends that Chesapeake's notice was untimely and ineffective.

To resolve the dispute, Chesapeake brought this declaratory judgment action. Between April 23 and 30, 2013, after expedited discovery, the Court held a bench trial. Trial was held on those dates to permit the Court to render decision before May 13, 2013—the redemption date that Chesapeake had set.

The following is the Court's decision. The Court holds, in favor of Chesapeake, that its March 15, 2013 notice of redemption was timely and effective to redeem the 2019 Notes at par value ( i.e., 100% of the principal amount) plus interest. The Court enters a declaratory judgment to that effect.

I. Background¹A. Overview: The 2019 Notes and § 1.7 of the Supplemental Indenture

Chesapeake is a publicly-traded Oklahoma corporation. It produces oil and natural gas.

In February 2012, Chesapeake completed a public offering of $1.3 billion in senior notes due in 2019 (the “Notes” or “2019 Notes”). The Notes pay at a rate of 6.775%. The 2019 Notes were issued pursuant to two indentures. The first is a Base Indenture, dated August 2, 2010. PX 6 (the “Base Indenture”). It governs a series of notes issued by Chesapeake since that date. BNY Mellon is named in the Base Indenture as trustee. Id. BNY Mellon is a national banking association with its principal place of business in Los Angeles, California.

The second indenture is Chesapeake's Ninth Supplemental Indenture, dated February 16, 2012. PX 4 (the “Supplemental Indenture”). The Supplemental Indenture applies solely to the 2019 Notes. Both the Base Indenture and the Supplemental Indenture recite that they were entered into between Chesapeake as the issuer, certain Chesapeake subsidiaries as guarantors, and BNY Mellon as the indenture trustee. See Base Indenture, at BNY24, BNY94–97; Supplemental Indenture, at CHK368, CHK373–75.

This dispute centers on § 1.7 of the Supplemental Indenture. Entitled “Redemption,” it provides in full:

(a) The Company shall have no obligation to redeem, purchase or repay the Notes pursuant to any mandatory redemption, sinking fund or analogous provisions or at the option of a Holder thereof.

(b) At any time from and including November 15, 2012 to and including March 15, 2013 (the “Special Early Redemption Period” ), the Company, at its option, may redeem the Notes in whole or from time to time in part for a price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest on the Notes to be redeemed to the date of redemption; provided, however, that immediately following any redemption of the Notes in part (and not in whole) pursuant to this Section 1.7(b), at least $250 million aggregate principal amount of the Notes remains outstanding. The Company shall be permitted to exercise its option to redeem the Notes pursuant to this Section 1.7 so long as it gives the notice of redemption pursuant to Section 3.04 of the Base Indenture during the Special Early Redemption Period. Any redemption pursuant to this Section 1.7(b) shall be conducted, to the extent applicable, pursuant to the provisions of Sections 3.02 through 3.07 of the Base Indenture.

(c) At any time after March 15, 2013 to the Maturity Date, the Company, at its option, may redeem the Notes in whole or from time to time in part for an amount equal to the Make–Whole Price plus accrued and unpaid interest to the date of redemption in accordance with the Form of Note.

Supplemental Indenture § 1.7 (emphasis in original).

The critical issue in this case is what the deadline is under § 1.7(b) for Chesapeake to give notice of redemption of the 2019 Notes at par plus interest. Under a Base Indenture provision (§ 3.04) expressly incorporated by § 1.7(b), Chesapeake, after giving notice of a redemption, must wait between 30 and 60 days before redeeming the subject Notes. The period during which Chesapeake may give notice of a special early redemption is, therefore, not coextensive with the period during which the redemption can be effectuated. Rather, the start of the notice period must precede the start of the redemption period by at least 30 days.

Chesapeake's position, based on the second sentence of § 1.7(b), is that the Special Early Redemption Period defined in § 1.7(b)— i.e., November 15, 2012, to and including March 15, 2013—is a notice period. Chesapeake argues, therefore, that, under § 1.7(b), a redemption at par plus interest can occur as late as May 14, 2013 ( i.e., 60 days after March 15, 2013). Accordingly, it argues, the notice of a special early redemption that it gave on March 15, 2013, was timely. BNY Mellon's position is that the Special Early Redemption Period instead bounds the period during which the actual redemption of bonds pursuant to § 1.7(b) may occur. Because a minimum of 30 days' notice is required before redemption, BNY Mellon argues that Chesapeake's deadline to give notice of a special early redemption was February 13, 2013 ( i.e., 30 days before March 15, 2013).

Lots of money turns on this dispute. Because the 2019 Notes bear an attractive interest rate of 6.775%, redeeming them at par plus interest is, in today's low-interest-rate environment, far more advantageous to Chesapeake than its other contractual options. These are (1) paying the 6.775% rate out to the 2019 maturity date, or (2) redeeming the bonds before the maturity date, but after the opportunity to redeem at par plus interest has lapsed, which, under § 1.7(c), would oblige Chesapeake to pay the noteholders the “Make–Whole Price,” i.e., the present value of the 6.775% interest rate payments to maturity. See PX 5, at BG2869–70. Conversely, a redemption by Chesapeake today at par plus interest deprives the holders of the 2019 Notes of an income stream not readily achievable elsewhere.

B. The Events of Late February and Early March 2013²

On February 20, 2013, Chesapeake notified Sharon McGrath, a BNY Mellon vice president, that it planned, by March 15, 2013, to redeem the 2019 Notes at par plus interest, pursuant to the special early redemption provision. McGrath did not initially object to that course. However, later that day, McGrath was contacted by James P. Seery, Jr., a partner in River Birch Capital LLC, a hedge fund, which had recently purchased a large volume of 2019 Notes. Seery notified McGrath that, in his view, the time period during which Chesapeake could redeem the 2019 Notes pursuant to the special early redemption provision had expired.

On February 22, 2013, McGrath, joined by counsel for BNY Mellon, notified Chesapeake that, in BNY Mellon's view, the time for Chesapeake to issue a notice of redemption pursuant to the special early redemption provision had passed. Six days later, in a call with Chesapeake's counsel, counsel for BNY Mellon reiterated that position. BNY Mellon also stated that, if Chesapeake issued a notice of redemption and it was held untimely, BNY Mellon might treat that notice as functioning as a notice of redemption pursuant to § 1.7(c) of the Supplemental Indenture. A redemption pursuant to § 1.7(c) would require Chesapeake, within 30 to 60 days, to pay the noteholders the Make–Whole Price. That payment would exceed by approximately $400 million the amount requiredto redeem the 2019 Notes pursuant to the special early redemption provision.

In an attempt to resolve this problem, Chesapeake prepared a proposed notice of redemption. See Compl. Ex. D (the “Notice”). That Notice, entitled “Notice of Special Early Redemption,” specified a redemption price, terms, and date (May 13, 2013) consistent with the special early redemption provision in § 1.7(b). Chesapeake's proposed Notice stated explicitly and prominently that, were a court to hold it untimely to effect a special early redemption, the Notice would be null and void. BNY Mellon objected to that approach. It notified Chesapeake that it viewed Chesapeake's proposed Notice as untimely; that such a “conditional notice” was improper; that Chesapeake's Notice, if issued, would be irrevocable; and that BNY Mellon would seek to have the Notice treated as a notice of an immediate Make–Whole Redemption...