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Chesapeake Prevails in Two Lawsuits, Facing Trial in Michigan Bid-Rigging Case

Chesapeake Energy Corp. has prevailed in two lawsuits, including one filed by shareholders, but it is facing a criminal trial after a Michigan judge ruled Wednesday there was enough evidence that it colluded with Encana Corp. to rig a land auction in 2010.

Cheboygan County District Court Judge Maria Barton of District Court 89 cited evidence of a conspiracy during an October 2010 auction, which apparently drove lease prices down [State of Michigan v Chesapeake Energy Corp., No. 14-0140-FY].

There is established "direct and circumstantial evidence" that Chesapeake and Encana "did in fact strike an agreement to bid-rig the state sale,” Barton stated. The judge cited evidence that included an email sent by former Encana USA CEO Jeff Wojahn to a landman bidding on behalf of the Calgary producer ahead of the October 2010 auction.

The email allegedly referenced a lease area being offered. "This is a Chesapeake area and we will not be bidding," Wojahn apparently stated.

The producers were formally charged in March for allegedly participating in a criminal conspiracy four years ago to avoid bidding against each other in the state land auction (see Daily GPI, March 6). The producers were at the time the biggest leaseholders in Michigan, mostly in the Collingwood Shale and Utica formation.

Public auctions of Michigan-held leases are held twice a year, in May and in October, by the Department of Natural Resources. In the May 2010 auction, Encana and Chesapeake were awarded leases that netted $178 million to the state in bonus payments, which at the time exceeded projections and broke a record (see Daily GPIMay 10, 2010). The October results were lower than expected.

Two charges regarding the bid rigging were dismissed by Barton on allegations that Chesapeake had struck a deal with Encana to avoid competing for the leases from private landowners, and for attempted antitrust violations against the landowners. Evidence presented did not support going forward with a trial on the two charges because even though the companies had discussed a way to avoid competing for private land, they did not consummate a deal, Barton said.

"Although there is ample discussion by both Encana and the defendant to attempt to bid-rig the individual landowners, the evidence is lacking as to an actual conspiracy," the ruling noted.

A Chesapeake spokesman said the company appreciated the evidence review dismissing two counts. However, the Oklahoma City driller plans to "continue to contest the remaining count, which we also believe has no merit."

Encana in May pleaded no contest to a misdemeanor charge that it attempted to commit antitrust violations with Chesapeake and agreed to pay a $5 million settlement to clear the company of criminal charges (see Daily GPIMay 5). Notably, in late April Encana and Chesapeake were cleared by the U.S. Department of Justice's antitrust division of attempting to manipulate the Michigan lease sale (see Daily GPIMay 1). Justice had been running a parallel investigation with Michigan authorities.

The Chesapeake trial for the remaining criminal count is scheduled to be heard in the 53rd Judicial Circuit Court in Rogers City, MI, but no trial date had been posted Thursday.

There were two positive results this week for Chesapeake. In the shareholder lawsuit, plaintiffs claimed they were intentionally misled regarding volumetric production payments (VPP) and the Founder Well Participation Program (FWPP).

However, a three-judge panel of the U.S. Court of Appeals for the Tenth Circuit on Tuesday upheld a lower court's decision to dismiss the lawsuit filed by shareholders Dvora and Steven Weinstein [Weinstein et al. v Aubrey K. McClendon, Chesapeake Energy Corp. et al, No. 13-6131]. The plaintiffs claimed they were misled through "false statements and omissions" regarding VPP transactions and the FWPP, which benefited McClendon, the co-founder and former CEO.

Under the FWPP, approved by shareholders more than once, McClendon was given the contractual right to participate and invest up to a 2.5% working interest in every well well the company drilled. The program was ended in 2012 (see Daily GPIApril 27, 2012).

The Weinsteins claimed the FWPP did not require McClendon to bear the costs of buying and developing land on which no wells ultimately were drilled, creating "an incentive for Mr. McClendon to cause the company to engage in an aggressive land-grab strategy that maximized his odds of participating in productive wells" and thus contribute to the company's debt.

Under the VPP program, similar to ones used by other producers, Chesapeake received cash immediately in exchange for a commitment to produce and deliver natural gas over a specific period. Chesapeake has indicated it raised more than $6.3 billion through the VPPs. However, plaintiffs claimed Chesapeake had failed to disclose that the VPPs ultimately would require the operator to spend $1.4 billion in future production costs.

The Tenth Circuit panel said shareholders had not demonstrated sufficiently that Chesapeake "intentionally withheld" facts about the FWPP or the VPPs,"or recklessly disregarded the importance of those facts...to deceive, manipulate or defraud" shareholders.

McClendon was forced out at Chesapeake in early 2013 and now helms privately held American Energy Partners LLC (see Daily GPIApril 17, 2013).

In another legal dispute, this one in Pennsylvania, Chesapeake also won on appeal. The Superior Court of Pennsylvania rejected an argument by landowners David and Sandra Nolt of Bradford County, who claimed that leasehold interests held by Chesapeake and a unit of Anadarko Petroleum Corp. were invalid under state law [David N. Nolt et al v. T.S. Calkins & Associates LP et al, No. 1214 MDA 2013]. The ruling upheld an order by the Court of Common Pleas, Bradford County, Civil Division [No. 09-QT000452].

At issue is the Nolt land, which includes a subsurface mineral estate that the original owner had leased to drillers, without realizing his children actually held the title. The plaintiffs argued that the leasehold should be invalid because Calkins, the exploration company that first leased the land, conducted no due diligence to confirm whether the original owner still held the property.

However, the Pennsylvania court found that Calkins had examined the records properly and had found no indication that the original owner didn't own the mineral estate. The court declined to address whether a lease is valid when it is executed by a party that no longer holds title to the land; the Nolts had not properly raised the question in court filings.

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