Area Landowners Claim Fraud In Oil & Gas Contracts

Apr 5, 2011

Last May, oil and gas companies spent of hundreds-of-millions of dollars buying up rights to drill in Michigan. By summer, private landowners in northern Michigan had signed leases promising record payments to drill for their minerals.

But by the end of the year, the frenzy over the new gas play had fizzled, and hundreds of people were claiming they'd been cheated. Lawsuits now say gas developers didn't just break their word, but they allegedly engaged in fraud and conspiracy to manipulate the market.

Feeling Bilked
The first person to file suit against the gas companies in Emmet County is Mildred Lutz. A sturdy 92 years old, she still keeps a garden and cans her own vegetables.

Last summer, a man knocked on her door and offered to pay her almost $100,000 dollars for the oil and gas deep underground beneath her farm.

Mildred had just lost her husband of 69 years, Carl, and she thought the money would come in handy for a whole list of expenses, including funeral costs.

"Let's see, I had eye surgery on both eyes. And, well, you always have taxes and they don't get any cheaper they go up every year.  And insurances that I have to pay," she says.

After talking it over with her five children, she signed a lease with the man from Western Land Services of Ludington squeezed around her kitchen table with a son and a grandson. Then they took the document to the bank in Alanson to be notarized.

She never heard another word from the oil and gas developers and she never got paid.

And how does she feel about that?

"Well not very good," she says. "I don't know, I've always kind of had the feeling of trusting a lot of people, I guess. I hate to see people being dishonest. When you do that you're just really hurting a lot of people that were depending on this."

Sensing A Pattern
Last summer, land men for a number of oil and gas companies were swarming over northern Michigan signing these leases. It appeared Michigan could be on the verge of a new natural gas boom to rival those in Louisiana and Pennsylvania. But by fall the activity seemed to drop off a cliff and Attorney Bill Rolinski says he heard from a lot of people who ended up in the same boat as Mildred Lutz.

Many of them showed up at town hall meetings held late last year.

"We'd have 200-to-400 people in attendance," he says. "And then I began to understand the scope of how the market was manipulated."

Rolinski has named six companies in lawsuits. But what he discovered is that they all were working on behalf of Chesapeake Energy, the second largest natural gas company in the country.

Rolinski says these companies did more than fail to live up to the contracts they signed, as with Mildred Lutz. He contends they acted together to manipulate the market by bidding up the prices of leases to record levels, in effect driving out competition. And while landowner's properties were tied up in those leases, Rolinski says, Chesapeake drilled a test well. He believes the test showed the Collingwood shale formation isn't as promising as the company first thought.

So after that, he alleges, Chesapeake conspired with its agents to bail out of these leases for what he calls bogus reasons, and hundreds of landowners were left holding worthless contracts.

"It didn't say in the contract, 'If the wells are good I will pay you. If they're not any good I'm not.' But that's in effect what happened," he says.

They'll Have To Prove It
An attorney for Chesapeake says that's an interesting story, but good luck proving conspiracy in a courtroom. Steve Barney, of Petoskey, is an experienced trial attorney, representing all the companies named in the lawsuits in northern Michigan.

"One of the easiest things to put in a complaint are allegations relating to fraud and conspiracy," he says. "But they're also the hardest to prove. And, all I can tell you is I would be absolutely flabbergasted if there is evidence produced supporting any of those allegations, period."

Barney says a large company such as Chesapeake is an easy target and he says there are good reasons some of these leases are not paid. The main one is a landowner has to show clear title to their property, and Barney insists that even a mortgage on the property can put a multi-million dollar gas well at risk of forfeiture, if a property owner defaults and the bank forecloses.

"A Texas court ruled that the lease holder lost their interest to the bank in a foreclosure proceeding," he says. "And you know how the economy has been in Michigan and what the housing market is. It's not a good market to be in."

But attorneys for landowners say that doesn't make sense. Bill Rolinski says most properties in Michigan have mortgages on them and, if all potential leases on properties with mortgages were rejected, mineral development would never get done.

Chesapeake's attorney says only a small fraction of oil and gas leases were rejected after being signed. But Bill Rolinski says the majority of Chesapeake leases with private landowners were never honored. He says other large gas producers such as the Canadian company Encana paid most of theirs.

"Here's Encana taking x number of leases in one county, paying 90 percent of their leases, all right. And here's Chesapeake, et al taking the same number of leases in the same county but paying none of them and saying there's title defects," Rolinski says. "There's got to be something wrong there, you know?"

It will be up to the courts to decide who may have done wrong. Attorneys, such as Rolinski, are planning to file more than a hundred cases alleging fraud, conspiracy and breach of contract.