Chesapeake Energy Corp. is being accused of hiding behind shell companies to avoid honoring land leases the company signed and then cancelled over the course of 2010.
But that is almost too black and white a summary for how the Oklahoma-based oil company is accused of hoodwinking farmers in Michigan, according to a Reuters special report .
Hydraulic fracturing and America's immensely profitable shale gas plays have sparked a huge land grab for potential leases. Chesapeake has been making headlines for aggressively pursuing such leases, but in Michigan, the company is being accused of committing fraud for purposefully rejecting 97 percent of its leases and failing to pay out a single dime in bonuses due to landowners, according to Reuters.
But Chesapeake said it never signed, much less rejected, leases in Michigan. Rather, a shell company by the name of Northern Michigan Exploration cancelled the hundreds of leases in Michigan, and through several subsequent shell corporations and local contractors, the link to Chesapeake was kept hidden from landowners through non-disclosure agreements.
Landowners were allegedly kept in the dark. Bonus checks never came, and instead, homeowners received letters sent by the various shell companies, including Northern, announcing the leases were cancelled, Reuters reported.
Apparently, Chesapeake wanted to back out when a subsidiary's exploratory well came up dry, according to the report.
But then another company, Crystal Lake Resources, came around and started buying leasing rights with depreciated values near where Northern Michigan Exploration cancelled leases, Reuters reported.
That would have been fine if not for the fact that several hundred miles away in North Dakota, the same company -- Crystal Lake Resources -- was signing leases under one parent company: Chesapeake.
The formation of front companies is not illegal, reported Reuters. It is reportedly a common practice in the corporate world allowing companies to hide financial and corporate transactions.
"Shells aren't just a device to pull the wool over landowners' eyes," John Lowe, a professor of energy law at Southern Methodist University, told Reuters.
"You have to weigh some of the unfortunate cases against the fact that these companies can facilitate doing business, making it easier and probably cheaper to obtain leases. If I were a regulator, I'm not sure I'd change anything or try to limit the use of shells."
So who is at fault, the shell companies or Chesapeake? That will have to be determined in court when hundreds of pending lawsuits are debated.
Chesapeake has denied wrongdoing. The company said it did pay out bonuses to some landowners. It also disputed the cancellation of Michigan contracts, instead saying that some deals were "rejected" because the property titles were not adequate, according to a company lawyer, Reuters reported.
However, "it suggests [Chesapeake] might have had a strategy going in of not honoring their agreements," Mark Gergen, a contract law professor at the University of California-Berkley, told Reuters.
Gergen added that the shell companies would have facilitated that strategy because Chesapeake could direct blame at the shells for cancellations, while protecting itself.
"The shells can complicate and delay things," Gergen told Reuters. "Chesapeake is probably betting that plaintiffs won't have sufficient resources or staying power to collect."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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