The June 2013 issue of Baseload included the article “A $400 Million Devil in the Details: The Cautionary Tale of the Chesapeake Par Call.” We published an update to that article in the January 2015 issue. On July 10, 2015, the District Court for the Southern District of New York held that Chesapeake is required to pay the noteholders the make-whole amount.

In February 2012, Chesapeake Energy Corp. issued unsecured notes that contained an unusual optional redemption feature that allowed Chesapeake to redeem the notes, at par, for several months following issuance. Chesapeake argued that as long as it gave notice by the March 15, 2013 deadline found in the indenture, it could redeem the notes at par. However, in the trustee’s view, the redemption needed to be complete by the March 15, 2013 deadline in order to take advantage of the par call.

Initially, the lower court agreed with Chesapeake. It ruled that the indenture was unambiguous in its requirement that notice only needed to be provided by March 15 to effectuate a redemption at par. However, on November 25, 2014, the Second Circuit U.S. Court of Appeals reversed the lower court’s ruling and held that the redemption needed to be completed by the March 15 deadline. As a result, the Second Court remanded the case back to the lower court in order to determine the amount of compensation due to the noteholders.

On remand, Chesapeake argued that, since it had never intended to initiate a make-whole redemption, the court should rely on equitable principles and grant the noteholders a more limited, restitutionary remedy. Instead, the court required Chesapeake to pay the make-whole amount. The majority relied on the previously established principle that restitution remedies should only be used in the absence of an express agreement or, if there is a contract, only in “unusual and ‘margin[al]’ circumstances.” In applying this rule to the facts of the case, the court reasoned that:

The Supplemental Indenture is comprehensive as to the two types of redemptions that may occur with respect to the 2019 Notes. And it defines them by date: Redemptions on or before March 15, 2013 are Special Early Redemption, see §1.7(b); redemptions after the date are Make-Whole Redemptions, see §1.7(c). These provisions together cover the universe of dates on which a redemption can occur.1

As a result, Chesapeake was ordered to pay $379.7 million to the noteholders, more than triple the roughly $100 million Chesapeake sought to distribute in “restitutionary” damages. Further, on July 16, Chesapeake was ordered to pay an additional $59.1 million, boosting the company’s total payout to $438.7 million. U.S.

District Judge Paul Engelmayer in Manhattan said the new payment reflects prejudgment interest at a 6.775 percent annual rate.

Counsel for Chesapeake filed a notice of appeal on July 27, 2015.