In an 80’s television series called Hill Street Blues, each episode would begin with the early morning roll call at the Hill Street Precinct. After going down a list of “items” his officers were exhorted to be on the watch for that day, Sergeant Phil Esterhaus would end each roll call with his immortal: “Hey, let’s be careful out there!” Sometimes he would emphasize “careful” even more forcefully by adding a modifier like “extra careful” or “really careful,” and occasionally he may have even said: “Let’s use an abundance of caution out there!” But regardless of the formulation, his message was always the same: the profession each of the officers had chosen required constant vigilance for the protection not only of themselves, but also of the public they served.
While the lawyers and deal professionals doing deals in the private equity space are rarely putting their lives, or those of others, at risk based on how well the contractual arrangements representing those deals are drafted, those written agreements can nonetheless have significant consequences. And constant vigilance, skilled lawyering and good deal-making skills remain critical. A recent reminder of the seriousness of drafting and interpreting contracts, and the care required in doing so, is the recent decision by the United States Court of Appeals for the Second Circuit in Chesapeake Energy Corp. v. Bank of N.Y. Mellon Tr. Co., No. 15-2366-cv (7th Cir. Sept. 15, 2016). In this decision, the Second Circuit affirmed the judgment of the District Court awarding damages in favor of the noteholders against Chesapeake Energy, in the amount of $438,717,561.67, for redeeming notes at par after the period specified for redemption at par. This decision is the second time the Second Circuit has addressed Chesapeake’s ill-fated redemption of its $1.3 billion in Notes based on Chesapeake’s interpretation of the Notes’ Supplemental Indenture.
In 2010, Chesapeake had issued $1.3 billion in Notes pursuant to a Supplemental Indenture that permitted the Notes to be redeemed at par between November 15, 2012 and March 15, 2013 (the “Special Early Redemption Period”), as long as Chesapeake provided at least 30, but no more than 60, days advance notice. Chesapeake had interpreted the Indenture as allowing an at par redemption as long as the required notice of redemption was given within the Special Early Redemption Period and as long as the notice specified a redemption date that was at least 30, but no more than 60, days after the notice, even though that redemption date occurred after the Special Early Redemption Period. Chesapeake had even sought and obtained a declaratory judgment on May 8, 2013, from the U.S. District Court for the Southern District of New York, that its notice of redemption mailed on March 15, 2013, was effective to permit an at par redemption on May 13, 2013 (i.e., within 60 days after March 15th). But the Indenture Trustee appealed that decision to the Second Circuit two days prior to May 13th and Chesapeake nevertheless proceeded with the redemption at par on that date.
Following that appeal, the Second Circuit reversed the District Court in 2014, holding that Chesapeake’s notice was ineffective to trigger the at par redemption price because that price was only available for a redemption that actually occurred within the Special Early Redemption Period. The Second Circuit then remanded the case back to the District Court to determine the consequences of the redemption having nevertheless proceeded. Because the redemption had occurred outside the Special Early Redemption Period, damages were accessed at the difference between the par redemption price and the “Make Whole” price that was otherwise required for a redemption occurring outside the Special Early Redemption Period. And this was despite the fact that Chesapeake had argued that they would not have consummated the redemption at all if they had not relied upon the original District Court judgment agreeing with their interpretation.
The relevant Indenture provisions were as follows:
Section 1.7(b) of the Supplemental Indenture:
At any time from and including November 15, 2012 to and including March 15, 2013 (the “Special Early Redemption Period”), [Chesapeake], at its option, may redeem the Notes in whole or from time to time in part for price equal to 100% of the principal amount of the Notes to be redeemed.… [Chesapeake] 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.
Section 3.04 of the Base Indenture:
(a) At least 30 days but not more than 60 days before a redemption date, [Chesapeake] shall mail a notice of redemption…to each Holder of Securities….
The actual subjective intent of the above provisions may well have been to provide Chesapeake a four month period in which to provide the required 30-60 days’ notice of redemption rather that to complete the actual redemption, but the Second Circuit, reading the actual words used to convey that intent, concluded that the words unambiguously conveyed a contrary meaning.
It is not what you intend by the words you use in a written agreement that determine their meaning; their meaning is determined regardless of any subjective intent, based on the meanings commonly ascribed to those words, particularly meanings ascribed in caselaw. Words truly matter! Deal professionals must review contracts with this premise in mind; and their counsel must continue to ensure, as this author has previously entreated, that their drafting is “responsive to the reported decisions of the courts that could ultimately be required to interpret that contract.” The former requires actual review of the written agreements by the deal professional (independent of any legal review), and the latter requires counsel that stays current on important drafting-related caselaw so that they are in a better position to be able to accurately “predict” how a court will interpret the words used in those agreements.
So, let’s continue to be especially careful out there, but let’s also remain certain that we have the right team employing the proper resources necessary to do so!