A federal appeals court ruled Tuesday that Chesapeake Energy violated the terms of its bond contracts when it redeemed $1.3 billion of bond notes six years early in order to get a better price for the notes.
The Second U.S. Circuit Court of Appeals reversed a May 2013 ruling that found Chesapeake properly redeemed the notes.
Bank of New York Mellon sued the Oklahoma based company claiming that the early redemption shortchanged bondholders, Reuters said.
Archer Capital Management, Ares Management, Aurelius Capital Management, Carlson Capital, Cetus Capital, Latigo Partners, Monarch Alternative Capital, P. Schoenfeld Asset Management, River Birch Capital and Taconic Capital Advisors all supported Bank of New York Mellon’s suit.
Chesapeake saved $100 million in interest payments by reedming the notes in May 2013 and recorded a $33 million loss.
The notes were set to mature in 2019.
The court said Chesapeake waited a month too long to inform investors of its intention to redeem the notes.
The early redemption was designed to lower the company’s debt burden and to help offset declines in natural gas prices.
In the majority opinion, the court said documents “unambiguously” showed that the company missed the deadline to redeem the notes for 100 cents on the dollar plus interest.
The case has been sent back to the lower court so it can consider whether the company should pay a “substantially higher make-whole price” that could total over $400 million.
Chesapeake said it is reviewing the decision and assessing its options.