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Atlantic Hydrocarbon, LLC v. SWN Production Co., LLC

United States District Court, M.D. Pennsylvania

June 15, 2018

ATLANTIC HYDROCARBON, LLC, Plaintiff,
v.
SWN PRODUCTION COMPANY, LLC, Defendant.

          MEMORANDUM OPINION

          Matthew W. Brann United States District Judge

         The SWN Production Company, LLC (“SWN”), moved to dismiss the Amended Complaint filed by Atlantic Hydrocarbon, LLC (“Atlantic”). For the reasons that follow, that motion will be granted in part and denied in part.

         I. BACKGROUND

         Atlantic and SWN are parties to several contractual agreements under which Atlantic is entitled to royalties from SWN's sale of oil and gas from certain properties. The royalties are calculated as a certain percentage of the “proceeds realized” from such sales, but SWN “is entitled to deduct” certain post-production costs from the royalties, if-and only if-those costs are “assessed by third parties.” The Amended Complaint alleges that Angelina Gathering Company, LLC (“Angelina”), has been gathering and marketing oil and gas from the properties at issue, and that SWN has been passing Angelina's post-production costs on to Atlantic through a reduction in Atlantic's royalties.

         Atlantic claims that this practice breaches the contractual agreements between it and SWN, and puts forth two theories to support that claim, both of which are based on its allegation that SWN and Angelina are wholly owned subsidiaries of the same parent company. First, Atlantic argues that the phrase “third parties” in the agreements is ambiguous and was intended to mean parties “unrelated to and unaffiliated with” SWN; consequently, due to its corporate relationship with SWN, Angelina is not a “third party” whose costs may be taxed against Atlantic's royalties.[1] Alternatively, Atlantic alleges that Angelina and SWN are alter egos of one another such that any costs charged by Angelina are costs charged by SWN, not a third party.[2]

         SWN has moved to dismiss Atlantic's Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), arguing that Atlantic has failed to state a claim upon which relief can be granted.

         II. DISCUSSION

         A. Standard of Review

         When considering a motion to dismiss for failure to state a claim upon which relief may be granted, [3] a court assumes the truth of all factual allegations in the plaintiff's complaint and draws all inferences in favor of that party;[4] the court does not, however, assume the truth of any of the complaint's legal conclusions.[5] If a complaint's factual allegations, so treated, state a claim that is plausible - i.e., if they allow the court to infer the defendant's liability - the motion is denied; if they fail to do so, the motion is granted.[6]

         B. Whether the Language of the Contractual Agreements is Ambiguous

         Atlantic argues that the phrase “third parties” in the contractual agreements is ambiguous, and alleges that the contracting parties intended it to mean parties “unrelated to and unaffiliated with” SWN.

         When resolving contractual disputes, it is this Court's “paramount” duty to determine the contracting parties' intent.[7] Although that intent is usually “to be ascertained from the document itself, ” this Court may consider extrinsic evidence of the parties' intent “where an ambiguity exists.”[8] Contractual ambiguity may either be apparent from the face of the document (“patent ambiguity”), or may be shown through extrinsic evidence (“latent ambiguity”).[9] To show latent ambiguity, the proffered evidence “must support an alternative meaning of a specific term or terms contained in the contract, rather than simply support a general claim that the parties meant something other than what the contract says on its face.”[10]Additionally, “the proffered interpretation cannot contradict the common understanding of the disputed term or phrase when there is another term that the parties could easily have used to convey this contradictory meaning.”[11]

         The phrase “third parties” is commonly used legal term of art which refers to “[a] person [or entity] who is not a party to a[n] . . . agreement”-i.e., “someone other than the principal parties.”[12] Had the parties intended to intended to convey Atlantic's proffered interpretation, they could have done so easily.[13] Therefore, this Court will reject Atlantic's argument that the phrase is patently ambiguous, and deny its attempt to introduce extrinsic evidence to show that it is latently ambiguous.

         Consequently, Counts I and II of the Amended Complaint will be dismissed to the extent they are based on Atlantic's claim that the ...


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