This week, a Cheboygan District Court Judge ruled that Chesapeake Energy will go to trial for alleged fraud.
Michigan Attorney General Bill Schuette has accused the Oklahoma-based energy company of swindling landowners in northern Michigan.
Peter Payette is with our partners at Interlochen Public Radio and he has been covering this story.
How did all of this start?
Around May of 2010, the state auctioned off the right to drill for oil and gas on public land.
"And that auction saw prices that were astronomical. The state in one day raised as much money from the sale of oil and gas rights as it had raised in its entire history," Payette says. "And that's because out-of-state companies believed that by using these newer methods of horizontal hydraulic fracturing that they could make a lot of money by drilling deep down in the ground and taking out natural gas."
These companies went out to private landowners that summer and asked to explore their properties for oil and gas. The landowners signed leases. "And those promised what is called a 'order of payment' and in many cases the landowners did not receive payment and may say they were cheated and are owed money," Payette says.
This June, Michigan Attorney General Bill Schuette accused one of the companies, Chesapeake Energy, of defrauding some landowners and conspiring to cheat them out of what they were owed.
From the AG's office:
On June 5, 2014, Schuette filed his second independent criminal case against Chesapeake Energy Corp. The complaint filed by Schuette alleges that Chesapeake directed their agents to recruit multiple Northern Michigan landowners to lease their land to Chesapeake the summer of 2010. It is alleged that landowners notified the agents of existing mortgages on the land to be leased before signing the lease, and the agents allegedly indicated the mortgages would not be a problem.
When competition from competitors stopped, Chesapeake – through its leasing agents including Oil Niagaran and a shell corporation called Northern Michigan Exploration – allegedly cancelled nearly all the leases, using mortgages and other bogus reasons, as the purported basis for the cancellation. Schuette alleges Chesapeake therefore obtained uncompensated land options from these landowners by false pretenses, and prevented competitors from leasing the land.
'Dry holes change things'
This week, Cheboygan District Court Judge Maria Barton says those charges can go forward because there's enough evidence to go to trial.
In her order, she references an exhibit that quotes Aubrey McClendon, the CEO of Chesapeake at the time.
"And according to the judge, this exhibit has McClendon talking to a agent of Chesapeake [Energy] saying they just drilled a dry hole. And in his words, "dry holes often dramatically change things,'" explains Payette.
Payette says the quote implies the company did some drilling and their findings "didn't look as good as it did when they signed all the leases and so that is why they wanted to get out of them."
However, the reasons given to various landowners were statements such as 'there's a mortgage on the property that creates an encumberance so we can't go ahead with our agreement,' " Payette says.
Chesapeake says that these are business disputes — a disagreement about the terms of a contract. In an email, a spokesperson says it's not surprising that the judge is allowing it to go to trial, but the burden of proof will be very high in court.
Chesapeake also accuses Michigan's attorney general of trying to criminalize business disagreements.