On July 10, 2015, the US District Court for the Southern District of New York held, in Chesapeake Energy Corp. v. Bank of New York Mellon Trust Co., N.A., that:

(No. 13 Civ. 1582 (PAE), (S.D.N.Y. July 10, 2015)).

In February 2012, Chesapeake Energy Corporation (Chesapeake) issued $1.3 billion in senior notes due on March 15, 2019, bearing an interest rate of 6.775% (Notes). The Notes were governed by a Base Indenture applicable to several series of notes, and a Supplemental Indenture specific to the Notes.

Section 1.7 of the Supplemental Indenture set out the terms under which Chesapeake could redeem the Notes before the due date. Section 1.7(b) of the Supplemental Indenture stated: "At any time from and including November 15, 2012 to and including March 15, 2013 (the "Special Early Redemption Period"), the Company, at its option, may redeem the Notes in whole or from time to time in part for a price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest on the Notes to be redeemed to the date of redemption. . . ." It further stated in section 1.7(c) that "[a]t any time after March 15, 2013 to the Maturity Date, the Company, at its option, may redeem the Notes in whole or from time to time in part for an amount equal to the Make-Whole Price plus accrued and unpaid interest to the date of redemption in accordance with the Form of Note."

Under Section 3.04 of the Base Indenture, a notice of redemption must be made between 30 and 60 days before the redemption itself.

On February 20, 2013, Chesapeake announced that it planned to redeem the Notes at the Special Early Redemption price of 100% of the Notes' principal amount, plus interest accrued to the date of redemption (Special Price). In Chesapeake's view, under Section 1.7(b) of the Supplemental Indenture, March 15, 2013 was the deadline to give a notice of a Special Early Redemption, not the deadline for such a redemption itself. Chesapeake proposed to issue a notice of Special Early Redemption on March 15, 2013 (Notice).

The indenture trustee, Bank of New York Mellon Trust Company, N.A. (BNY Mellon), however, notified Chesapeake that, in its view, the time to give notice of a redemption at the Special Price had expired under Section 1.7(b) of the Supplemental Indenture. Under this view, March 15, 2013 was the deadline for the redemption itself, and therefore it was therefore no longer possible on February 20, 2013 for Chesapeake to meet that deadline while giving the required 30 days' notice.

On March 8, 2013, Chesapeake filed an action against BNY Mellon, bringing two claims:

On May 8, 2013, the District Court issued a decision finding the Notice timely, ruling in favor of Chesapeake on Count One, on two grounds:

The District Court therefore entered judgment for Chesapeake on Claim one and held that Claim Two was moot.

On May 13, 2013, Chesapeake redeemed the Notes, paying the Noteholders about $1.3 billion, as calculated under the Special Early Redemption provision.

On November 25, 2014, the US Court of Appeals for the Second Circuit reversed, holding that the Supplemental Indenture authorized Chesapeake to redeem the Notes at par only if the redemption occurred within the Special Early Redemption Period (that is, by March 15, 2013), with notice of 30 to 60 days also given during that period. The Second Circuit therefore entered judgment for BNY Mellon on Claim One, and directed the District Court to consider Chesapeake's Claim Two to determine the amount of damages due to the Noteholders.

On remand, the District Court held that:

The District Court rejected Chesapeake's argument that it should only pay restitution because it did not intend to redeem the notes at the make-whole price.

In rejecting Chesapeake's claim, the District Court adopted a mechanical line of reasoning. It held that the Indenture governed the subject matter, because recovery in quasi-contract is generally precluded for disputes concerning a particular subject matter governed by a valid contract, as the one in this case. The subject matter of Section 1.7 was the early redemption of the Notes, including the precise money due to the Noteholders depending on the date of that redemption. The District Court reasoned that, where the parties have set out their respective rights and obligations as to a particular subject matter in a valid, enforceable agreement, that agreement will guide a court setting remedies.

The District Court further reasoned that Chesapeake's proposal was in tension with the Second Circuit's holding that Section 1.7 was textually unambiguous. The District Court noted the Second Circuit's holding that Section 1.7 unambiguously made March 15, 2013 the deadline for a Special Early redemption itself, and therefore made February 13, 2013 the deadline for providing notice of such a redemption.

The District Court also noted that Chesapeake was aware that the Second Circuit may overturn the decision and that it could therefore be held liable for the make-whole. Despite having this knowledge, Chesapeake voluntarily proceeded with the redemption.

Following the same reasoning (namely, the mechanical application of the Indenture), the District Court held that the prejudgment interest should be paid at the contractual rate provided in the Indenture, rather than the equitable rate proposed by Chesapeake.

While Chesapeake was a contractual dispute that was not decided under principles of bankruptcy law, it offers insight into the enforceability and treatment of make-whole claims which bankruptcy courts might consider when determining make-whole disputes.

For more information on make-whole provisions in bankruptcy, see Practice Note, Treatment of Make-whole and No-call Provisions in Bankruptcy and Chemtura Roadmap: Analysis of Make-whole and No-call Provisions in Bankruptcy.