CHEBOYGAN COUNTY, MI -- A Cheboygan County judge has ordered Oklahoma-based Chesapeake Energy Corp. bound over for trial on racketeering and false-pretenses charges for allegedly defrauding Northern Michigan landowners.
Chesapeake is awaiting trial in Cheboygan County Circuit Court in a separate case alleging it violated anti-trust laws in a bid-rigging scheme prior to an October 2010 auction of oil and gas lease.
Chesapeake contends that state Attorney Bill Schuette is trying to criminalize legitimate business disputes.
"This outcome is not unexpected given that the Attorney General's burden was substantially lower than he will be required to prove at trial," Chesapeake communications director Gordon Pennoyer said.
"We continue to believe the Attorney General is attempting to criminalize basic contract disputes. Chesapeake remains focused on moving past these legacy issues from 2010 and executing our business strategies to drive profitable growth through financial discipline and the efficient development of our world-class assets."
In the latest case, District Judge Maria Barton said that a Chesapeake subsidiary hired another company to buy oil and gas leases in Northern Michigan in 2010.
Related: Is Oklahoma oilman Aubrey McClendon in trouble over his deals with Michigan landowners?
Northern Michigan Exploration Co., the subsidiary, hired Oil Niagaran, or OILN, to act as a leasing agent. OILN contracted with Western Land Services.
Together, they “flooded Northern Michigan with landmen to purchase oil and gas leases from landowners in certain areas of Northern Michigan,” the judge wrote in her decision.
She said landmen would offer oil and gas leases at prices ranging from $250 to $1,400 an acre. They signed about 850 oil and gas leases and Orders for Payment. The leases gave Chesapeake the right to look for oil and gas on landowners’ property.
Orders for Payment provided that Western would make payment within 90 days subject to inspection and approval of title. Several landowners asked about mortgages, and were told they would not be a problem. Representatives of OILN and Western testified that mortgages do not normally cause cancellation of orders for payment because most land is encumbered.
In late July 2010, Chesapeake told OILN vice-president Dave McGuire it wanted to stop all leasing, the judge said.
Aubrey McClendon, the former Chesapeake CEO, told McGuire that the company “had just drilled a dry hole and in his words ‘dry holes often dramatically change things,’” the judge wrote.
The defendant allegedly told McGuire to find any reason to cancel leases.
In a July 30, 2010, email, Dave Bolton, a Chesapeake executive, told an OILN worker: “There should be no misunderstanding … we do not wish for you to tender payment for any leases.”
Henry Hood, a senior vice president for Chesapeake, emailed to McGuire, the OILN vice president: "I appreciate the awkward position you're in. We do have ethical obligations as landmen, but we also have overriding fiduciary obligations to Chesapeake shareholders and other stakeholders. The fact is, these leases are largely worthless now and the prospect of paying $35 million for nothing at this point is unacceptable.
"Paying all these minerals owners will only provide a windfall for them. We need to work hard to get our arms around these obligations and close on only those we absolutely must. Please work with our team to determine which leases can be rejected."
McGuire followed the instructions and rejected leases for any reason it could find, including unreleased oil and gas leases, unreleased mortgages, leases not properly executed, leases that were not on an approved form and leases executed after the project ended.
The judge ruled that lessors should have been told that payments would be made only if gas or oil was found.
“If ‘drilling a dry hole dramatically changes things,’ then the landowners entering into oil and gas leases should have been informed of that fact before signing leases and orders for payment,” the judge wrote.
Kevin Hackner, a landman who was “integral” in securing leases, said he would not have worked on the project if leases were conditioned on the defendant finding oil or gas – or if landowners were not told about that requirement.
“I’d like to think I wouldn’t secure documents under false pretenses,” he testified.
The judge ruled that Chesapeake failed to tell landowners that payment would not be made unless oil and gas were found on a lessor’s property. The company cancelled most of its leases by claiming it had authority because properties had mortgages or lines “when in reality it canceled the majority of the leases (close to 800) due to drilling a dry hole,” Barton wrote.
If convicted of racketeering, Chesapeake could be fined up to $100,000. False pretenses between $1,000 and $20,000 carries a fine of $10,000 on each count, or three times the value of the money or property involved, whichever is greater.
John Agar covers crime for MLive/Grand Rapids Press E-mail John Agar: jagar@mlive.com and follow him on Twitter at twitter.com/ReporterJAgar