Chesapeake Energy Corp. v. Bank of N.Y. Mellon Trust Co.
| Decision Date | 10 July 2015 |
| Docket Number | 13 Civ. 1582 (PAE) |
| 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 |
On May 8, 2013, this Court entered a declaratory judgment that plaintiff Chesapeake Energy Corporation ("Chesapeake") had timely issued a notice of "Special Early Redemption," and was therefore entitled, under a Supplemental Indenture, to redeem at par a series of senior notes it had issued in 2012, which were to mature in 2019. On May 13, 2013, Chesapeake redeemed those notes at par. However, on November 25, 2014, the Second Circuit overturned this Court's decision. It held that Chesapeake had missed the deadline for a Special Early Redemption, and thus could not lawfully redeem at par.
This decision resolves issues that the parties agree are properly resolved on remand. Most significant, the Court decides the compensation that the Noteholders are due. Agreeing with indenture trustee (and defendant) Bank of New York Mellon Trust Company, N.A. ("BNY Mellon"), the Court holds that the Noteholders were entitled to be paid the "Make-Whole" Price which, under the Supplemental Indenture as construed by the Second Circuit, was due upon redemption of the notes if Chesapeake redeemed after March 15, 2013. Accordingly, Chesapeake must pay the Noteholders compensation consistent with their entitlement to theMake-Whole Price. The Court therefore grants BNY Mellon's motion for further relief, and denies Chesapeake's cross-motion for an order of restitution.
The Court assumes familiarity with the facts of this case. These are chronicled in detail in the Court's May 8, 2013 decision and the Second Circuit's decision. See Chesapeake Energy Corp. v. Bank of N.Y. Mellon Trust Co., 957 F. Supp. 2d 316 (S.D.N.Y. 2013), rev'd and , 773 F.3d 110 (2d Cir. 2014). The Court recites here only the most central facts.
In February 2012, Chesapeake issued $1.3 billion in senior notes due on March 15, 2019, bearing an interest rate of 6.775% ("the 2019 Notes" or "the Notes"). The 2019 Notes were governed by a Base Indenture applicable to several series of notes, and a Supplemental Indenture specific to the 2019 Notes.
Section 1.7 of the Supplemental Indenture set out the terms under which Chesapeake could redeem the 2019 Notes before the due date. Entitled "Redemption," Section 1.7 provided, in its entirety:
Dkt. 1, Ex. B, at 6. Section 1.7(b) thereby referenced § 3.04 of the Base Indenture, which provided, inter alia, that a notice of redemption must be made between 30 and 60 days before the redemption itself:
At least 30 days but not more than 60 days before a redemption date, [Chesapeake] shall mail a notice of redemption by first-class mail to each Holder of Securities to be redeemed at such Holder's registered address.
Dkt. 185 ("Baron Decl."), Ex. I.
Section 1.7(c), in referring to the "Make-Whole Price" applicable to redemptions after the Special Early Redemption Period, referenced a term defined elsewhere in the Supplemental Indenture as "the sum of the outstanding principal amount of the Notes to be redeemed plus the Make-Whole Amount of such Notes." See Dkt. 1, Ex. B (Supplemental Indenture, Form of Note ("Form of Note")) ¶ 5, at A-4. The "'Make-Whole Amount' with respect to a Note" is, in turn, defined as "an amount equal to the excess, if any, of (i) the present value of the remaining principal, premium, if any, and interest payments due on such Note (excluding any portion of such payments of interest accrued as of the redemption date) as if such Note were redeemed on the Maturity Date, computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (ii) the outstanding principal amount of such Note." Id.
On February 20, 2013, Chesapeake announced that it planned to redeem the 2019 Notes at the Special Early Redemption price of 100% of the notes' principal amount (i.e., par), plus interest accrued to the date of redemption (the "Special Price"). In Chesapeake's view, under§ 1.7(b), March 15, 2013 was the deadline to give a notice of a Special Early Redemption, not the deadline for such a redemption itself.
BNY Mellon, however, notified Chesapeake that, in its view, the time to give notice of a redemption at the Special Price had expired. BNY Mellon's view, supported by various holders of the 2019 Notes ("the 2019 Noteholders" or "the Noteholders"), was that the deadline under § 1.7(b) for a Special Early Redemption was March 15, 2013; it was therefore no longer possible to meet that deadline while giving the required 30 days' notice. Further, in an apparent effort to deter Chesapeake from attempting such a redemption, BNY Mellon warned Chesapeake that any such attempt could backfire: If Chesapeake issued a notice of Special Early Redemption that a court held untimely such that no such redemption went forward, BNY Mellon stated that it might, as indenture trustee, seek to treat such a notice as triggering a redemption under § 1.7(c), requiring Chesapeake to pay the Make-Whole Price rather than holding the Notes to maturity.
On March 8, 2013, Chesapeake filed this action against BNY Mellon, bringing two claims. Dkt. 1 ("Compl."). Claim One sought a declaratory judgment that a notice of Special Early Redemption at the Special Price, if issued on March 15, 2013 and providing for a redemption on May 13, 2013, would be timely. Claim Two sought a declaratory judgment that such a notice, if held untimely by this Court to effect a Special Early Redemption such that no redemption occurred, would not trigger redemption at the Make-Whole Price under § 1.7(c), but rather would be void. Chesapeake's Complaint appended the notice it proposed to issue on March 15, 2013 ("the Notice"). See id. Ex. D. The Notice stated that (1) redemption at the Special Price would occur on May 13, 2013, if this Court by then had ruled the Notice timely to effect a Special Early Redemption, but (2) if the Court had not so ruled by that date, the Notice would be null and void and would not trigger a redemption at the Make-Whole Price.
Chesapeake contemporaneously moved for emergency relief along the lines of Claim Two. It sought an order that, if Chesapeake issued the Notice for a Special Early Redemption but this Court held it untimely to effect such a redemption, the notice would not bring about a Make-Whole Redemption. On March 14, 2013, the Court denied Chesapeake's motion, finding that the standards for emergency relief had not been met. See Dkt. 43 ("3/14/13 Tr."). But the Court stated in strong terms its initial view, agreeing with Chesapeake, that, were the Court to hold the Notice untimely to effect a Special Early Redemption such that no redemption went forward, the Notice would be void, and would not trigger a Make-Whole redemption under § 1.7(c).
On March 15, 2013, Chesapeake issued the Notice.
In late April 2013, after expedited discovery, the Court held a bench trial.
On May 8, 2013, the Court issued a decision finding the Notice timely, and thus finding for Chesapeake on Count One, on two grounds. Dkt. 115. First, the text of § 1.7(b) permitted a Special Early Redemption so long as the notice of such a redemption had issued during the Special Early Redemption Period (i.e., by March 15, 2013). Second, even if the indenture text was ambiguous, the extrinsic evidence demonstrated that the parties who negotiated the Supplemental Indenture had intended March 15, 2013 as the deadline for a notice of redemption, not for the redemption itself. The Court therefore entered judgment for Chesapeake on Claim One. Claim Two, the Court held, was moot.
On May 11, 2013, BNY Mellon filed a notice of appeal. Dkt. 117.
On May 13, 2013, Chesapeake proceeded with the redemption, paying the Noteholders approximately $1.3 billion, calculated pursuant to the Special Early Redemption provision. See Dkt. 178 ("2/24/15 Tr."), 26-27.
On November 25, 2014, the Second Circuit reversed. It held that the Supplemental Indenture authorized Chesapeake to redeem the 2019 Notes at par only if the redemption occurred within the Special Early Redemption Period, i.e., no later than March 15, 2013, with notice of 30 to 60 days also given during that period. Judgment was therefore to be entered for BNY Mellon on Claim One. In remanding, the Second Circuit directed the Court to...
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