Canfield v. Statoil USA Onshore Properties INC et al

Filing 85

MEMORANDUM (Order to follow as separate docket entry) re 75 MOTION for Reconsideration and Reargument filed by Cheryl B. Canfield.Signed by Honorable Malachy E Mannion on 6/12/17. (bs)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF PENNSYLVANIA
CHERYL B. CANFIELD,

:

Plaintiff,

: CIVIL ACTION NO. 3:16-0085

v.

:

STATOIL USA ONSHORE
PROPERTIES INC.,

(JUDGE MANNION)

:
:

Defendant.
:
MEMORANDUM
Currently before the court is a motion for reconsideration filed by plaintiff
Cheryl B. Canfield (“Canfield”). (Doc. 75). Canfield requests that this court
reconsider its March 22, 2017 order and memorandum. (Docs. 72–73).
Specifically, Canfield requests that this court reconsider dismissing the first
and second claim for relief in Canfield’s complaint, (Doc. 1), against remaining
defendant Statoil USA Onshore Properties, Inc. (“SOP”).1 Based on the
foregoing, Canfield’s motion is DENIED.

I.

BACKGROUND
Canfield owns property in the Marcellus Shale region within

Pennsylvania. On May 6, 2008, Canfield entered into an oil and gas lease

1

The court also dismissed all claims against former defendants Statoil
Natural Gas LLC and Statoil ASA. Canfield does not seek reconsideration of
the court’s dismissal of the claims against these entities.

with Cabot Oil & Gas Corporation (“Cabot Oil”) for the exploration of oil and
natural gas on her land. Her lease was subsequently acquired, in part, by
defendant SOP. Her dispute with SOP primarily revolves around the royalty
clause in her lease agreement.
In her complaint, Canfield challenged SOP’s calculation of royalties.
SOP’s calculation is based on the sale of Canfield’s natural gas at the well,
with that sale price calculated using an index price. SOP takes title to its inkind percentage of the natural gas extracted at the well and immediately sells
the natural gas to an affiliate, Statoil Natural Gas LLC (“SNG”), pursuant to an
agreement between the two entities. Under this agreement, SNG takes title
to the raw product at the wellhead and then contracts with third parties for
post-production services. SNG also contracts with pipeline companies to
transport the natural gas through the interstate pipeline system and,
ultimately, resells the final product to third-party buyers at receipt/delivery
gates along the interstate system. Thus, SOP holds the lease interests for
immediate sale and SNG serves as a marketing company, taking title at the
well, transforming the product into a finished one, and then selling the postproduction product to distribution companies, industrial customers, and power
generators downstream.
At issue in this action is the agreement between SOP and SNG for the
price of the raw natural gas at the wellhead where title is transferred from
SOP to SNG. Their agreement fixes the price of the natural gas to a uniform
2

hub price or index price for natural gas, regardless of whether the natural gas
is ever delivered to that particular hub on the interstate pipeline system.
These index prices are influential in natural gas markets and purport to
represent the price of natural gas at different delivery points in the country. In
or around April 2010, SOP and SNG began using a chosen index price as
opposed to what Canfield described as an “actual negotiated price.” (Doc. 1
¶26). SOP does not dispute that it fixes the price at the wellhead to an index
price.
On January 15, 2016, Canfield filed a putative class action complaint
against SOP, SNG, and the indirect parent of these entities, Statoil ASA.
Canfield brought six separate claims against SOP specifically. In her first
claim, Canfield alleged that SOP breached the express terms of the royalty
clause in her lease agreement by using an index price. In her second claim,
Canfield alleged that SOP breached the lease by engaging in an affiliate sale
with SNG. In her fourth claim, Canfield alleged that SOP breached the implied
covenant of good faith and fair dealing in the lease by engaging in an affiliate
sale. In this claim, she also alleged that SOP “had an obligation to use
reasonable best efforts to market the gas to achieve the best price available.”
(Id. ¶50). The court construed this fourth claim as a duty of good faith claim
and/or a duty to market claim. Canfield also alleged civil conspiracy (third
claim) and unjust enrichment (fifth claim). She also requested an accounting
as a specific form of relief (seventh claim).
3

On July 9, 2016, SNG filed a motion to dismiss Canfield’s complaint.
(Doc. 25). Also on July 9, 2016, SOP and Statoil ASA, collectively, filed a
motion to dismiss. (Doc. 31). On March 22, 2017, the court granted SNG’s
motion and dismissed all claims against SNG with prejudice. The court
granted in part and denied in part SOP’s and Statoil ASA’s joint motion. The
court dismissed all claims against Statoil ASA with prejudice, finding that the
entity was a Norwegian entity immune from suit under the Foreign Sovereign
Immunities Act of 1976 (“FSIA”), PUB. L. NO. 94-583, 90 STAT. 2891 (codified
at and amending scattered sections of 28 U.S.C.). The court dismissed some,
but not all of the claims against SOP.
As against SOP, the court dismissed with prejudice the first, second,
third, fifth, and sixth claims for relief. (See Doc. 73). The court allowed the
implied breach claim, the fourth claim, to proceed. The court determined that
Canfield had pled a plausible breach of the implied duty to market, though not
a plausible good faith claim under Pennsylvania law. In addition, because
Canfield has asserted a plausible contract claim the court allowed her request
for an accounting, her seventh claim, to proceed.
On April 5, 2017, Canfield filed the current motion for reconsideration
and brief in support. (Docs. 75–76). On April 26, 2017, after requesting and
receiving an extension of time, SOP filed a brief in opposition. (Doc. 81).
Canfield filed a reply on May 10, 2017, (Doc. 82), rendering her motion ripe
for review. Canfield specifically seeks reconsideration of the court’s March 22,
4

2017 decision with respect to her express breach of contract claims—her first
and second claims for relief. In the alternative, she seeks reconsideration of
the court’s decision to dismiss those claims with prejudice and requests leave
to amend her complaint. SOP argues that reconsideration is not warranted.

II.

LEGAL STANDARDS
A.

Motions for Reconsideration

A motion for reconsideration may be used to seek remediation for
manifest errors of law or fact or to present newly discovered evidence which,
if previously discovered, might have affected the court's decision. United
States el rel. Schumann v. Astrazeneca Pharmaceuticals, L.P., 769 F.3d 837,
848 (3d Cir. 2014) (citing Max’s Seafood Café v. Quineros, 176 F.3d 669, 677
(3d Cir. 1999)); Harsco Corp. v. Zlotnicki, 779 F.2d 906, 909 (3d Cir. 1985).
A party seeking reconsideration must demonstrate at least one of the
following grounds: (1) an intervening change in the controlling law; (2) the
availability of new evidence that was not available when the court granted the
motion; or (3) the need to correct a clear error of law or fact or to prevent
manifest injustice. Lazaridis v. Wehmer, 591 F.3d 666, 669 (3d Cir. 2010);
Max’s Seafood Café, 176 F.3d at 677 (citing North River Ins. Co. v. CIGNA
Reinsurance Co., 52 F.3d 1194, 1218 (3d Cir. 1995)). However, “[b]ecause
federal courts have a strong interest in the finality of judgments, motions for

5

reconsideration should be granted sparingly.” Continental Casualty Co. v.
Diversified Indus. Inc., 884 F. Supp. 937, 943 (E.D. Pa. 1995).
Reconsideration is generally appropriate in instances where the court
has “misunderstood a party, or has made a decision outside the adversarial
issues presented to the [c]ourt by the parties, or has made an error not of
reasoning, but of apprehension.” York Int’l Corp. v. Liberty Mut. Ins. Co., 140
F. Supp. 3d 357, 360–61 (3d Cir. 2015) (quoting Rohrbach v. AT & T Nassau
Metals Corp., 902 F. Supp. 523, 527 (M.D. Pa. 1995)). It may not be used as
a means to reargue unsuccessful theories that were presented to the court in
the context of the matter previously decided “or as an attempt to relitigate a
point of disagreement between the [c]ourt and the litigant.” Id. at 361 (quoting
Ogden v. Keystone Residence, 226 F. Supp. 2d 588, 606 (M.D. Pa. 2002)).
The “motion will not be granted merely because a party is dissatisfied with the
court’s ruling, nor will a court consider repetitive arguments that were
previously asserted and considered.” Frazier v. SCI Med. Dispensary Doctor
+ 2 Staff Members, No. 1:07-194, 2009 WL 136724, at *2 (M.D. Pa. Jan. 16,
2009) (collecting cases).

B.

Leave to Amend
The filing of an amended complaint is governed by Federal Rule

of Civil Procedure 15. Where the time to amend as a matter of right has

6

expired,2 “a party may amend its pleading only with the opposing party’s
written consent or the court’s leave.” FED. R. CIV. P. 15(a)(2). “The court
should freely give leave when justice so requires.” FED. R. CIV. P. 15(a). In the
spirit of Rule 15, the United States Court of Appeals for the Third Circuit has
adopted a liberal approach to the amendment of pleadings in order to ensure
that “a particular claim will be decided on the merits rather than on
technicalities.” Dole v. Arco Chem. Co., 921 F.2d 484, 486–87 (3d Cir. 1990).
Amendment, however, is not automatic. See Dover Steel Co., Inc. v. Hartford
Accident and Indent., 151 F.R.D. 570, 574 (E.D. Pa.1993). Leave to amend
will not be granted if there is “undue delay, bad faith or dilatory motive on the
part of the movant, repeated failure to cure deficiencies by amendments
previously allowed, undue prejudice to the opposing party by virtue of the
allowance of the amendment, futility of amendment, etc.” Foman v. Davis, 371
U.S. 178, 182 (1962); see also Oran v. Stafford, 226 F.3d 275, 291 (3d Cir.
2000).
The court’s dismissal of Canfield’s first and second claim for relief with
prejudice was premised on futility.
Futility means that the complaint, as amended, would
fail to state a claim upon which relief could be
granted. The standard for assessing futility is the
same standard of legal sufficiency as applied under
Federal Rule of Civil Procedure 12(b)(6). In other
words, the District Court determines futility by taking

2

See FED. R. CIV. P. 15(a)(1).
7

all pleaded allegations as true and viewing them in
the light most favorable to the plaintiff.
Great W. Mining & Mineral Co. v. Fox Rothschild LLP, 615 F.3d 159, 175 (3d
Cir. 2010) (internal quotation marks, citations, and original alterations
omitted). If the proposed amendment “is frivolous or advances a claim or
defense that is legally insufficient on its face, the court may deny leave to
amend.” Harrison Beverage Co. v. Dribeck Imp., Inc., 133 F.R.D. 463, 468
(D.N.J.1990).

III.

DISCUSSION
Canfield challenges the dismissal of her express breach of contract

claims on two primary grounds. First, she alleges that the court’s construction
of her lease agreement was incorrect, an error of law. Canfield proposes a
new interpretation of her lease that was not previously proposed to the court.
Second, she alleges that the court misconstrued her second claim for relief,
a factual error that warrants a different result on the motion to dismiss or
leave to amend the complaint. The court disagrees and will address each
argument in turn.

A.

Canfield’s Lease and the Court’s Construction

Canfield’s breach of contract claims revolve entirely around the
interpretation of the royalty clause in her lease agreement. This provision
provides, in part, as follows:

8

Lessee . . . shall pay the Lessor on gas, including
casinghead gas and other gaseous substances,
produced and sold from the premises fifteen percent
(15%) of the amount realized from the sale of gas at
the well.
(Doc. 1-2 at 1 ¶3) (emphasis added). The clause goes on to define “the
amount realized from the sale of the gas at the well” as follows:
“The amount realized from the sale of the well” shall
mean the amount realized from the sale of the gas
after deducting gathering, transportation,
compression, fuel, line loss, and any other postproduction costs and/or expenses incurred for the gas
whether provided by a third party, Lessee or by a
wholly owned subsidiary of Lessee.
(Id.). In addition, in a superceding addendum to the primary lease document
that was attached to the lease and signed and dated the same day as the
initial lease document there is a “ready for sale or use” clause. (Id. at 3–4).
This clause directs the lessee to exclude any production or post-production
costs in its calculation of royalties, stating as follows:
Royalties shall be paid without deductions for the cost
of producing, gathering, storing, separating, treating,
dehydrating, compressing, transporting, or otherwise
making the oil and/or gas produced from the lease
premises ready for sale or use.
(Doc. 1-2 at 4 ¶13). The addendum states that if there are any inconsistences
between the added terms in the addendum and the printed lease terms, the
added terms will control and supercede the printed terms of the lease. (Id. at
3).

9

As explained in the court’s March 22, 2017 memorandum, certain terms
in the lease are well-defined. The phrase “amount realized” in an oil and gas
royalty clause has acquired a technical meaning. It “is commonly viewed as
synonymous with proceeds.” 8 Patrick H. Martin & Bruce M. Kramer, Williams
& Meyers, Oil and Gas Law, Manual of Oil & Gas Terms A (LexisNexus
Matthew Bender 2016) (hereinafter Williams & Meyers). Thus, Canfield’s
lease is a proceeds lease.
The phrase “at the well” is “commonly understood to mean that the oil
and gas is to be valued in its unprocessed state as it comes to the surface at
the mouth of the well.” Williams & Meyers, Manual of Oil & Gas Terms A
(emphasis added). Thus, the phrase “at the well” relates to the proper
valuation of the natural gas product, but does not necessarily dictate where
the sale is to be made, the point of sale.
The point of sale is left undefined in the lease. Canfield, in her complaint
and briefing, argued that the royalty clause required using the net-back
method. This method is used when the sale of the natural gas occurs, not at
the wellhead, but at some point downstream. To arrive at a wellhead price or
the value “at the well,” the lessee must deduct post-production costs. This
would be a plausible construction of the lease if not for the “ready for sale or
use” clause. This provision explicitly prohibits the deduction of post-production
fees.
In arriving at its conclusion, the court first noted that the original royalty
provision allowed for the deduction of post-production costs to arrive at a
10

wellhead price by explicitly defining “[t]he amount realized from the sale of gas
at the well” as allowing these deductions. As the court noted, however, the
“ready for sale or use clause” explicitly disallowed the deduction of postproduction costs and was incorporated in an addendum that purported to
control and supercede the printed terms of the lease. As the court explained:
The only way to construe the “at the well” language
and ready for sale or use clause together is to require
a sale at the physical location of the well. If the sale
was to be made downstream, as Canfield suggests,
without deductions for post-production costs, as the
explicit lease language suggests, then the resulting
royalty could not be a wellhead price. This
interpretation would render the phrase “at the well”
meaningless as this phrase indicates royalties should
be based on the wellhead value, not the value of the
product downstream.
(Doc. 72 at 46). Construing all of the lease language together, the court
determined that SOP’s royalty calculation based on a sale at the physical
location of the well, without the need to deduct post-production costs incurred
to get the product downstream, was proper. Canfield’s first claim for relief was
then dismissed based on the court’s interpretation of the contract.
Next, the court discussed Canfield’s second claim for relief which, as
stated in the complaint, did not explain if Canfield was alleging a breach
based on the express terms of the lease or implied terms. This claim was
entirely premised on SOP’s sale to an affiliate, SNG, which Canfield alleged
was at “artificially low prices.” (Doc. 1 ¶39). Canfield alleged that these sales
did not constitute “arms’-length transactions.” (Id. ¶40). These same
allegations regarding the necessity of “arms-length transactions” were also
11

included in Canfield’s fourth claim for relief based on the implied covenant of
good faith and fair dealing and the implied duty to market. (See id. ¶¶49–52).
Unsure if Canfield’s second claim was based on an express or implied term,
the court addressed both possible interpretations of Canfield’s “affiliate claim.”
The court could find no express term requiring SOP to engage in an arms’length sale and dismissed any express breach claim with prejudice. (See Doc.
72 at 48).
The court allowed Canfield’s fourth claim to proceed based on the
implied duty to market. (See id. at 58–60). The court found that SOP’s usage
of an index price, SOP’s sale to an affiliated entity, and the change in the
index price around September of 2013 implicated a plausible breach of the
implied duty to market. This implied duty required SOP to obtain the best
current price reasonably available because the lease was a proceeds lease
and not a market value lease.3 The court concluded that it did not have
enough information to determine if this implied obligation had been satisfied.
In addition, in several instances Canfield had suggested that the sale
to SNG was a “sham.” (Doc. 1 at ¶¶29, 46). SOP, in its briefing, argued that
this allegation needed to be dismissed because Canfield had not pled and
could not show the elements needed to disregard SOP and SNG’s separate,
corporate forms. The court disagreed and allowed the “sham sale” allegation
to proceed when coupled with the other allegations regarding the index price

3

See Union Pacific Res. Grp., Inc. v. Hankins, 111 S.W.3d 69, 72 (Tex.

2003).
12

and the change of that index price in 2013. (Doc. 72 at 60). Though not
explicitly stated in the court’s opinion, the court likened the sham sale
allegation to misbehavior on SOP’s part, not an attempt to disregard SNG’s
separate corporate form.

B.

Canfield’s Newly Proposed Interpretation of the Lease

Canfield now proposes that the “ready for sale or use” clause in the
addendum supercedes the “at the well” language in the original royalty
provision. Canfield argues that both the original lease terms and the “ready
for sale of use” clause contemplated a downstream sale. The court does not
agree with Canfield’s interpretation of the lease.
In Pennsylvania, a lease “must be construed in accordance with the
terms of the agreement as manifestly expressed, and ‘[t]he accepted and
plain meaning of the language used, rather than the silent intentions of the
contracting parties, determines the construction to be given the agreement.’”
Jedlicka, 42 A.3d at 267 (quoting Willison v. Consol. Coal Co., 637 A.2d 979,
982 (Pa. 1994)). “Determining the intention of the parties is a paramount
consideration in the interpretation of any contract.” Hutchinson v. Sunbeam
Coal Corp., 519 A.2d 385, 389 (Pa. 1986). Generally, a contract should be
construed as a whole and all of its parts and provisions should be given effect
if possible. 16 SUMM. PA. JUR. 2D Commercial Law §1:124 (2d ed.). “A
contract should not be interpreted in a way that leads to an absurdity or

13

renders the contract ineffective to accomplish its purpose.” Clairton Slag, Inc.
v. Dep’t of Gen. Servs., 2 A.3d 765, 773 (Pa. Commw. Ct. 2010).
The intention of the parties should be determined based on the
language of the contract itself if that language is clear and unambiguous.
Hutchinson, 519 A.2d at 390. If the language is ambiguous, “parol evidence
is admissible to explain or clarify or resolve that ambiguity, irrespective of
whether the ambiguity is created by the language of the instrument or by
extrinsic or collateral circumstance[—i.e., a latent or patent ambiguity].” Id.
(quoting In re Herr Estate, 191 A.2d 32, 34 (Pa. 1960)). Whether an ambiguity
exists is a matter of law. Id.
Canfield proposes that the addendum language “assumes a sale
downstream.” (Doc. 76 at 5). The provision states, in part:
Royalties shall be paid without deductions for the cost
of producing, gathering, storing, separating, treating,
dehydrating, compressing, transporting, or otherwise
making the oil and/or gas produced from the lease
premises ready for sale or use.
(Doc. 1-2 at 4 ¶13). The court fails to see how this provision presumes
anything other than the fact that the lessee cannot deduct certain postproduction costs. This interpretation is, of course, completely proper and in
accord with the “at the well” language when the lessee is selling the natural
gas at the physical location of the well. If the provision requires something
more, this requirement must be implied and is not based on the addendum’s
express language.

14

In support of her interpretation of the lease language contemplating a
downstream sale, Canfield submitted an affidavit from her attorney, Douglas
A. Clark, along with attached exhibits. (Doc. 77). The affidavit and exhibits
detail conversations between Attorney Clark and SOP’s in-house counsel,
Mary Lou Fry. The attached correspondences between Attorney Clark and
Attorney Fry did not discuss Canfield’s specific lease, but a lease with another
landowner in the putative class. (Id. at 2 ¶2). This class member’s lease does
not calculate royalties based on “the amount realized from the sale at the
well,” as Canfield’s lease does, but on “revenue realized by Lessee for all gas
. . . produced and marketed from the Leasehold, less the cost to transport,
treat, and process the gas.” (See id. at 3). This lease has no “at the well”
language. The lease does have an addendum provision that disallows the
deduction of certain post-production costs from proceeds, but allows

15

deductions if the lessor enhances the market value to receive a better price.4
This provision is also not identical to Canfield’s “ready for sale or use” clause.
First, Attorney Clark’s discussion with Attorney Fry about a different
lease and their interpretations of that lease do not shed light on the proper
interpretation of Canfield’s lease. The leases do not have identical royalty
provisions or identical addendum provisions. While it is true that there
appears to be a conflict between the allowance of certain deductions in the
original lease language and the addendum language discussed by Attorney
Clark and Attorney Fry, that conflict does not present an identical issue when
compared to Canfield’s lease. Unlike Canfield’s lease, the addendum
language in the lease discussed by Attorney Clark and Attorney Fry does

4

The addendum provision at issue in the correspondences states, in

part:
It is agreed between the Lessor and Lessee that,
notwithstanding any language herein to the contrary,
all oil, gas or other proceeds accruing to the Lessor
under this lease or by state law shall be without
deductions, directly or indirectly, for the cost of
producing, gathering, storing, separating, treating,
dehydrating, compressing, processing, transporting,
and marketing the oil, in enhancing the value of the
marketable oil, gas or other products to receive a
better price may be deducted from the Lessor’s share
of production so long as they are based on Lessee’s
actual costs of such enhancements.
(Doc. 77-1 at 3) (emphasis added). This provision was incorporated into a
correspondence sent to SOP and the court presumes that it accurately quotes
the relevant lease addendum provision despite being grammatically unsound.
16

allow some deductions. How the original royalty provision and the addendum
interact to form the parties’ agreement in that lease and whether an ambiguity
exists in that lease is not a matter before this court. That lease is not before
the court. It is the language of Canfield’s particular lease that informs the
court’s interpretation of Canfield’s agreement.
Second, it is only when the language of the lease is ambiguous that the
court can turn to parole or outside evidence “to explain or clarify or resolve
that ambiguity.” Hutchinson, 519 A.2d at 390. Thus, even if Canfield’s lease
and the lease discussed in correspondences with SOP’s counsel were
identical, the court could only turn to these letters for guidance if the written
lease language was ambiguous. The court sees no ambiguity in Canfield’s
lease.
There is nothing ambiguous about the phrase “at the well.” There is also
nothing ambiguous about the “ready for sale or use” clause. The court can
see no ambiguity when these provisions are read together. The court reads
these two provisions together to avoid an absurd result, particularly avoiding
turning a proceeds, wellhead value royalty clause into a downstream, market
value royalty clause. SOP has managed to comply with both provisions. In
doing so, SOP and SNG created a market at the well. This was likely
unforeseen by Canfield at the time of the signing of the lease as the industry
was rapidly expanding in the Marcellus Shale region during this time. There
is no express language prohibiting this conduct and SOP’s conduct violates

17

neither the initial lease language or the addendum. If SOP’s conduct is a
violation of the lease, it is based on implied, but not express, terms.
Canfield also asserts that the “ready for sale or use” clause completely
modified the “at the well” language and that the addendum language and “at
the well” language cannot be read together. (Doc. 76 at 5 n. 2). Canfield does
not explain exactly how the addendum modifies the “at the well” language. As
explained above both can in fact be read together. If Canfield’s interpretation
of the addendum suggests that the initial “at the well” language means
something other than “at the well”—i.e., wellhead value—this interpretation
must fail based on the plain language of the lease. Accordingly, any claim
against SOP based on its sale of gas at the well, as opposed to downstream
of the well, fails.

C.

Canfield’s “Sham Transaction Theory”

Next, Canfield argues that the court misinterpreted the “affiliate claim”
stated in her second claim for relief. Canfield argues that this affiliate claim
was intended to be an express breach of contract claim based on the sham
transaction theory stated in Flanagan v. Chesapeake Exploration LLC, No.
3:15-CV-0222-B (N.D. Tex. August 10, 2015), an unpublished decision. The
court agrees that it misinterpreted Canfield’s second claim for relief.
As explained in her brief, Canfield’s second claim for relief was
premised on the idea that the sale between SOP and SNG was a sham
warranting disregard of the corporate form of these two entities. The court
18

interpreted Canfield’s sham allegations as allegations of SOP’s misbehavior
and/or attempts to reduce royalties, not as an allegation of alter ego or veil
piercing. Canfield did not allege any of the factors warranting disregarding
SNG’s separate, corporate form as SOP correctly noted in its briefing to the
original motions to dismiss. Nor did Canfield include any specific “sham”
allegations in her second claim for relief. Nonetheless, the court finds that this
sham transaction claim fails.
In Flanagan, the Northern District of Texas found that a lessor stated a
plausible claim for express breach of contract where the lessee sold gas at
the wellhead to its wholly-owned subsidiary. Flanagan, slip op. at 2, 9. The
court found that the lessor’s claim was plausible under a “sham transaction
theory,” as termed by the court. Id. at 8–9. This theory utilized the alter-ego
theory under Texas law. Id. The court’s sham transaction theory had, at its
foundation, a decision by the Texas Court of Appeals in Texas Oil & Gas
Corp. v. Hagen, 683 S.W.2d 24 (Tex. App. 1984). Like Flanagan, the facts in
Hagen involved a sale between a parent and a wholly-owned subsidiary and
the Hagen court’s reasoning was premised on disregarding the corporate
form. Hagen, 683 S.W.2d at 28. The Hagen opinion was withdrawn and set
aside by the Texas Supreme Court due to settlement. See Texas Oil & Gas
Corp. v. Hagen, 760 S.W.2d 950 (Tex. 1988). The Flanagan court concluded
that the theory stated in the Hagen opinion remained valid even though it was
not affirmed by the Texas Supreme Court. Flanagan, slip op. at 8.

19

The sham transaction theory in Flanagan and Hagen is simply this: if the
two entities in the sale are treated as one and the same and their corporate
form is disregarded then technically no sale has occurred and the true sale
is at some other point. Any royalties that were paid based on that false sale
would be improper, not based on actual proceeds, and an express breach of
contract. While this might be a theoretical basis for liability under Texas law,
the court cannot fit this theory into the facts of this particular case in light of
Pennsylvania law.
Application of the sham transaction theory used in Flanagan would
require this court to find that SOP and SNG are one and the same.
Analytically, this would make the transaction between them a nullity or as
Canfield explains a “sham.” To make this claim plausible Canfield must have
alleged the five elements of the single entity theory, not the alter ego theory,
and then shown that Pennsylvania law would allow the sham transaction
theory on that basis. This court would then be faced with deciding whether the
Pennsylvania Supreme Court would adopt such a novel theory. The court
need not dive into those complexities, however, as two of the elements of the
single entity theory are fatal to Canfield’s novel claim.
In Pennsylvania, there is a strong presumption against disregarding the
corporate form absent unusual circumstances. Lumax Indus., Inc. v. Aultman,
669 A.2d 893, 895 (Pa. 1995). There are different names used by courts to
disregard the corporate form including the alter ego theory and/or piercing the
corporate veil, reverse piercing, and the single entity theory. “The alter ego
20

theory is applicable where the individual or corporate owner controls the
corporation to be pierced and the controlling owner is to be held liable.”
Miners, Inc. v. Alpine Equip. Corp., 722 A.2d 691, 695 (Pa. Super. Ct. 1998)
(emphasis in original). The enterprise entity theory or single entity theory is to
be used “where two or more corporations share common ownership and are,
in reality, operating as a corporate combine.” Id.
In order to use Flanagan’s sham transaction theory, the court would
need to apply the single entity theory to disregard the separate corporate
forms of SOP and SNG. Unlike the entities in Flanagan and Hagen, SOP and
SNG are not in a parent-subsidiary relationship. Instead, they are affiliated
due to their indirect ownership by Statoil ASA, a Norwegian entity that is no
longer a party to this case. The alter ego theory is not applicable in this
context, but the single entity theory might be applicable if the court presumes
that Statoil ASA’s indirect ownership is common ownership of both entities.5
The Pennsylvania Supreme Court has not yet officially adopted the
single entity theory, just as it has not adopted Flanagan’s sham transaction
theory. See J.B. Hunt Transport, Inc. v. Liverpool Trucking Co., Inc., No. 1:11CV-1751, 2013 WL 3208586, at *4 (M.D. Pa. June 24, 2013); id.; In re
Atomica Design Grp., Inc., 556 B.R. 125, 173 (Bankr. E.D. Pa. 2016). There
5

The court makes this presumption for analytical purposes, but it is not
clear that indirect ownership can be a basis for applying the single entity
theory or that SOP and SNG are fully owned by entities that are wholly owned
by Statoil ASA. The disclosure statements filed by SOP and SNG do make
this point clear, but the statements do clearly indicate that Statoil ASA does
not directly own both entities. (See Docs. 12–13).
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is no consensus regarding whether or not the Pennsylvania Supreme Court
would adopt the single entity theory. See J.B. Hunt Transport, 2013 WL
3208586, at *4. Most courts confronted with the issue have avoided making
this determination where the plaintiff inadequately pleaded its elements. In re
Atomica Design, 556 B.R. at 174, n. 33 (collecting cases). The court agrees
that this is wise and will not address whether Pennsylvania would adopt the
single entity theory because Canfield has not pled the required elements to
state this novel type of claim when used in conjunction with Flanagan’s sham
transaction theory. Similarly, whether the Pennsylvania Supreme Court would
adopt the sham transaction theory where the lessee is a parent entity selling
to a wholly-owned subsidiary, or vice-versa, is an issue the court need not
address.
The elements of the single entity theory include (1) identity of
ownership, (2) unified administrative control, (3) similar or supplementary
business functions, (4) involuntary creditors, and (5) insolvency of the
corporation against which the claim lies. Miners, 722 A.2d at 695. Canfield’s
novel sham transaction/single entity claim fails based on the fourth and fifth
elements of the single entity theory. Addressing the fourth element, there is
no indication that SOP is an involuntary creditor. “An involuntary creditor is
someone who did not have the opportunity to rely on any information when
becoming a creditor, such as a tort victim.” J.B. Hunt Transport, 2013 WL
3208586, at *4. Assuming SOP owes royalties to Canfield, SOP is a voluntary
creditor due to the contractual nature of the relationship. See id. With respect
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to the fifth element, there is no allegation or any indication that SOP is
insolvent.
Flanagan’s sham transaction theory as a basis for express breach of
contract is not plausible when coupled with the single-entity theory, assuming
the Pennsylvania Supreme Court would adopt either theory. The single entity
theory, if it were to be valid in Pennsylvania, is applicable only where the
primary debt holder cannot pay and is a theory used in the interest of equity.
It is not a primary basis for contractual liability when viewing its elements. To
apply the single entity theory, in advance and without insolvency, as a basis
for holding an entity liable for express breach of contract is not plausible.
Accordingly, Canfield second claim for relief premised on the sham
transaction theory is not plausible.

D.

Denial of Leave to Amend

Canfield requests that if the court cannot reconsider its ultimate decision
to grant SOP’s motion to dismiss that, in the alternative, the court grant her
leave to amend the complaint. The court sees no basis for granting her leave.
The court’s interpretation of the lease is a matter of law and Canfield has
offered no basis for changing that interpretation. There is no express
language in the lease that SOP breached. With respect to the second claim
for relief premised on the sham transaction theory, this claims fails as
explained above. Any amendment to the complaint to replead this claim would
be futile. Accordingly, Canfield’s request for leave to amend will be denied.
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IV.

CONCLUSION
For reasons stated above, Canfield’s motion for reconsideration, (Doc.

75), will be DENIED. SOP’s conduct complied with the express terms of the
lease. Canfield’s claim for breach of implied obligation may, of course,
proceed. In addition, Canfield has not asserted a plausible express breach of
contract claim based on a sham transaction theory. Based on the facts
alleged, such a claim is not plausible and any amendment to restate this
claim, if the court were to permit it, would be futile. Accordingly, the court finds
no basis for reconsidering its previous dismissal of Canfield’s first and second
claim for relief with prejudice. An appropriate order shall follow.

s/ Malachy E. Mannion
MALACHY E. MANNION
United States District Judge
Dated: June 12, 2017
O:\Mannion\shared\MEMORANDA - DJ\CIVIL MEMORANDA\2016 MEMORANDA\16-0085-03.wpd

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