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FARMINGTON — The trustee of Hart Oil & Gas claims in court documents filed earlier this month that a financial backer of the bankrupt oil and gas company may have committed fraud.

Liquidation trustee Marilyn Smelcer filed an objection May 5 to claims that Citizens Bank of Kilgore is owed more than $1 million from the sale of Hart Oil's assets due to a loan the bank made to Hart Oil in June 2008.

Smelcer claims in the objection that Citizens Bank of Kilgore sold its $1 million loan to Palo Petroleum on Sept. 24, 2012, one day before Hart Oil & Gas filed for Chapter 11 bankruptcy protection.

Therefore, Citizens Bank of Kilgore has falsely claimed throughout the nearly three and a half years of bankruptcy proceedings that it is a secured creditor, a violation of federal law, according to Smelcer's objection.

The trustee included with the objection a contract that appears to show that the loan was assigned to Palo Petroleum on the date in question.

Executive Vice President Kenneth Plunk signed the contract on behalf of Citizens Bank of Kilgore, according to the document. He did not respond to a request for comment.

Attorneys Nancy Cusack of the Santa Fe law firm Hinkle Shanor LLC and Scott Ritcheson of the Tyler, Texas, law firm Ritcheson, Lauffer & Vincent are representing the bank in the bankruptcy proceedings. They did not respond to requests for comment.

Palo Petroleum President James Graham also did not respond to a request for comment.

As reported by The Daily Times in March, Smelcer previously claimed in an amended complaint filed March 20 that Citizens Bank of Kilgore, Palo Petroleum and oilman John Ehrman used underhanded tactics — including property seizures, phony environmental complaints and corporate spies — to drive Hart Oil to the brink of bankruptcy.

The purpose of the scheme, according to Smelcer, was to force Hart Oil to sell leasing rights it acquired from the Navajo Nation to a straw company created by Ehrman for significantly less than the leases were worth.

According to the complaint, Citizens Bank of Kilgore downgraded its own loan to Hart Oil and Gas in May 2012 and began to stop or delay payments to local vendors in San Juan County, limiting Hart Oil's ability to obtain work materials and services.

When Hart Oil declared bankruptcy on Sept. 25, 2012, it owed tens of thousands of dollars to various local businesses, including Dawn Trucking of Farmington, Mann Pipe Co. of Bloomfield, Cave Enterprises in Farmington and WSI Machine & Supply in Farmington, according to court records.

Smelcer herself is owed $200,000 by Hart Oil & Gas as an unsecured creditor.

The New Mexico Taxation & Revenue Department and the Navajo Tax Commission are also creditors in the bankruptcy, records state.

Rep. James Strickler, R-Farmington, said in a letter filed in the bankruptcy proceedings on March 27 that the allegations made by the trustee are "troubling."

"I am hopeful that as this legal proceeding progresses to conclusion, the parties responsible for causing possible harm to Hart Oil & Gas and to Farmington area businesses will be held accountable," he said in the letter.

Strickler, who also serves as chair of the Energy, Environmental and Natural Resources Committee for the state House of Representatives, said in an interview Thursday the matter will need to be addressed in court, but he is sympathetic to local small business owners.

"This is something that the judicial branch needs to take care of," he said.

Citizens Bank of Kilgore has not filed a formal response to the allegations, according to court records, but previously denied claims it colluded with Palo Petroleum or Ehrman to seize Hart Oil's assets.

Matt Krumtum, a spokesman for Smelcer, said in a press release Sunday that the Office of the United States Trustee for New Mexico has been informed of the alleged fraud by Citizens Bank of Kilgore.

Steve Garrison covers crime and courts for The Daily Times. He can be reached at 505-564-4644 and stgarrison@daily-times.com. Follow him on Twitter @SteveGarrisonDT on Twitter.

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