* Trial expected to conclude next week
* Trustee: redemption requires $400 million payment
* Chesapeake faces $100 million in interest payments
By Bernard Vaughan
NEW YORK, April 23 Chesapeake Energy Corp
began an expedited trial on Tuesday against Bank of New
York Mellon Corp over the energy company's effort to
redeem $1.3 billion of notes at par.
The proceeding in Manhattan federal court comes less than
two months after Chesapeake sued the bank, the trustee for the
bonds, seeking to prevent it from interfering with the
The dispute is separate from other legal issues involving
Chesapeake, the second-largest natural gas producer in the
Chesapeake, which faces a projected $3 billion cash
shortfall this year, argues that it had until this past March 15
to notify noteholders that it intended to redeem the notes,
which have an interest rate of 6.775 percent and mature in 2019,
If it is not able to, the company will pay about $100
million in interest, one of its attorneys, Stephen Ascher, said
in court on Tuesday.
The bank disagrees, arguing that Chesapeake had to complete
any par redemption by March 15, and that any redemption
thereafter requires it to pay an additional $400 million
make-whole payment to investors.
The trial is expected to run through early next week. U.S.
District Judge Paul Engelmayer is hearing the case without a
At the trial's start, Ascher said the company's witnesses
will include Chesapeake Chief Financial Officer Domenic
Dell'Osso, who helped draft the bond offering. They will testify
that it was understood that Chesapeake would have until March 15
to notify investors that it intended to redeem the bonds early,
The bank's case would be based on the argument that
Chesapeake's witnesses do not matter, Ascher told the judge. He
said Bank of New York Mellon did not participate in drafting
terms of the bond offering and is the only party involved that
disputes Chesapeake's view of the March 15 deadline.
"Chesapeake's interpretation of the text is the only
reasonable interpretation," Ascher said.
But Steven Bierman, a lawyer for Bank of New York Mellon,
said that Chesapeake's evidence is irrelevant. There was no
understanding between Chesapeake and Bank of New York Mellon
that the energy company had only to issue a redemption notice by
March 15, he said.
Further, there is no written communication that discussed
the early redemption period as only requiring notice, Bierman
Aubrey McClendon, Chesapeake's former chief executive
officer who had been appointed by the company's board to oversee
pricing of the debt offering, said in a deposition that he
"didn't know anything" about the portion of the contract in
question, Bierman said.
"March 15 is a bright line between redemption at par and
redemption at the make-whole payment," Bierman said.
Chesapeake is facing several other legal issues, including a
probe by the U.S. Securities and Exchange Commission into a perk
that granted McClendon a stake in company wells and a U.S.
Department of Justice investigation into possible antitrust
violations in Michigan land deals.
McClendon left the company on April 1.
The case is Chesapeake Energy Corp v. Bank of New York Mellon
Trust Co, U.S. District Court, Southern District of New York,