UPDATE 2-Chesapeake noteholders, BNY Mellon escalate bond battle
* Noteholders say redemption would shortchange them
* Chesapeake seeks rights as to 6.775 pct notes due 2019
* Trustee Bank of NY Mellon also opposes Chesapeake
* Price of notes rises further above face value
March 12 (Reuters) - Chesapeake Energy Corp is facing a showdown with investors and a bond trustee over its plan to redeem $1.3 billion of notes early.
The natural gas company, which faces a projected $3 billion cash shortfall this year, is hoping to avoid an extra $400 million of payments on the notes, which carry a 6.775 percent interest rate and mature in 2019.
Chesapeake filed a lawsuit last Friday in U.S. District Court in Manhattan seeking to block bond trustee Bank of New York Mellon Corp from interfering with the proposed redemption of the debt at 100 cents on the dollar, or par.
But in a court filing on Tuesday, investors who own roughly $250 million of the notes contended that the plan would shortchange them, saying the notes are worth more and that the move would violate Chesapeake's contractual obligations.
Bank of New York Mellon also filed court papers opposing the redemption plan.
Jim Gipson, a Chesapeake spokesman, declined to comment.
A hearing is scheduled for Tuesday afternoon before U.S. District Judge Paul Engelmayer in Manhattan.
Chesapeake has said the proposed redemption is part of a broader plan to refinance its debt. A higher payout would hurt its balance sheet.
The 6.775 percent notes traded up 3.1 cents at 106.1 cents on the dollar in morning trading, with a yield of 5.57 percent, according to bond pricing service Trace.
Chesapeake shares were down 19 cents at $21.27 on the New York Stock Exchange.
The dispute is separate from a U.S. Securities and Exchange Commission probe over a perk that granted Chesapeake's departing chief executive, Aubrey McClendon, a stake in company wells.
In addition, the U.S. Department of Justice is examining possible antitrust violations over Chesapeake land transactions in Michigan.
BALANCE OF HARDSHIPS
Chesapeake is seeking a court order giving it until March 15 to provide investors with notice of its note redemption rights, and a preliminary injunction to block Bank of New York Mellon from interfering.
The noteholders, who were not earlier part of the lawsuit, sought to intervene, saying Chesapeake showed an "utter failure to demonstrate any irreparable harm, likelihood of success on its claims, or that the balance of hardships on its motion tip decidedly in Chesapeake's favor."
In a separate court filing, James Seery, who said he is a partner at noteholder River Birch Capital LLC, said that under the contract, the redemption price should now be about 129 cents on the dollar, not 100 cents.
If Chesapeake prevails, even temporarily, "River Birch and the other note holders will suffer material monetary damages," Seery said.
Bank of New York Mellon called the injunction request premature and likely to fail on the merits.
"Chesapeake, having missed the deadline to redeem the notes at par, now demands an advisory opinion from the court, seeking to guarantee the idiosyncratic treatment of a future redemption notice which has not been made," the bank said in its court papers. "Chesapeake has suffered no injury and lacks standing."
The case is Chesapeake Energy Corp. v. Bank of New York Mellon Trust Co NA, U.S. District Court, Southern District of New York, No. 13-01582.
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