By Bernard Vaughan
NEW YORK (Reuters) - Chesapeake Energy Corp <CHK.N> began an expedited trial on Tuesday against Bank of New York Mellon Corp <BK.N> over the energy company's effort to redeem $1.3 billion (852 million pounds) 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 redemption.
The dispute is separate from other legal issues involving Chesapeake, the second-largest natural gas producer in the United States.
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, at par.
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 jury.
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, he said.
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 argued.
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, No. 13-01582.
(Reporting By Bernard Vaughan; Editing by Martha Graybow and Andrea Ricci)