JOHN W. SEDWICK

ORDER AND OPINION

[Re: Motion at Docket 8]

I. MOTION PRESENTED

At docket 8, defendants ISIS, LLC of Oklahoma ("ISIS"), Freeman Properties, LLC, C.R. "Bobby" Freeman ("Freeman"), and Tammy Freeman (collectively "defendants") move pursuant to Federal Rule of Civil Procedure 12(b)(1) to dismiss some of plaintiff's state law claims for lack of subject matter jurisdiction. Plaintiff CYA Oil & Gas Investments, LLC ("CYA" or "plaintiff") opposes the motion at docket 14. Defendant's reply is at docket 17. Oral argument was requested but would not assist the court.

II. BACKGROUND

This lawsuit arises out of a failed oil and gas project in Oklahoma. CYA is a Texas limited liability company. Hung Simon Vo ("Simon Vo") was the representative of CYA. Based on discussions between Freeman, who represented to have purchased ISIS, and Steve Hutchinson ("Hutchinson"), an officer of ISIS-and Simon Vo, CYA invested at least $655,000 in ISIS and later, Black Gold, LLC ("Black Gold"), during 2008 and 2009. Black Gold was created by Freeman in 2009 to insulate investors in ISIS from counterclaims against Freeman in a lawsuit against the original owners of ISIS. Freeman was the managing member of Black Gold.

Among the representations made to Simon Vo were that Freeman, through his ownership of ISIS, had production rights at three wells-the HFA #1, Adkins, and Yvonne wells-and that early investors could get a return of 25 times their investment. CYA maintains that Freeman represented to Simon Vo that combined expected revenue from all three wells would exceed $45 million in the first year of production. CYA claims that Freeman actually did not have production rights at any of the three wells. CYA also maintains that Freeman used investors' funds to make the down payment in the stock purchase agreement by which Freeman was to purchase ISIS and did not disclose that to investors.

Freeman replaced the independent operators of all three wells with his own company, Last Run, LLC ("Last Run"). Last Run shut down the Yvonne well approximately one month after operations began. CYA claims that the failure of the Yvonne well was not disclosed to CYA and that Last Run billed Black Gold approximately $1.4 million during the Yvonne well's month of operation. Last Run also had difficulties drilling at the other wells and production was dismal.

Black Gold considered a cash call from investors after funds dried up. In response, Black Gold's board requested an accounting. CYA states that Freeman could not provide a coherent accounting. CYA maintains that in December 2010 Freeman hired an accounting firm to perform a preliminary review of Black Gold's accounting. The firm concluded that Black Gold paid approximately $1.9 million directly to Freeman without invoices, that numerous expenses could not be tied to well-related work and that over 50% of all expenses were not invoiced. The preliminary review also concluded that Black Gold was approximately $900,000 in debt but only received total revenues from all wells of $416,528.

CYA filed suit in federal court in January 2012. CYA has asserted claims for breach of contract, breach of fiduciary duty, misrepresentation, securities fraud under Arizona law, federal securities fraud, rescission, and accounting. The court has original jurisdiction over CYA's three federal securities fraud claims pursuant to 28 U.S.C. § 1331. Defendants argue that several of CYA's state law claims should be dismissed.

III. STANDARD OF REVIEW

Under Federal Rule of Civil Procedure 12(b)(1), a party may seek dismissal of an action for lack of subject matter jurisdiction. In order to survive a defendant's motion to dismiss, the plaintiff has the burden of proving jurisdiction. Where the defendant brings a facial attack on the subject matter of the district court, the court assumes the factual allegations in the plaintiff's complaint are true and draws all reasonable inferences in the plaintiff's favor. The court does not, however, accept the truth of legal conclusions cast in the form of factual allegations.

IV. DISCUSSION

Pursuant to 28 U.S.C. § 1367(a), "in any civil action of which district courts have original jurisdiction, the district courts . . . have supplemental jurisdiction over all other claims . . . that . . . form part of the same case or controversy under Article III." "A state law claim is part of the same case or controversy when it shares a common nucleus of operative fact with the federal claims and the state and federal claims would ordinarily be tried together." A district court may nonetheless decline to exercise supplemental jurisdiction over state claims if the state claims "substantially predominate" over the federal claims.

Defendant makes two arguments. First, defendant argues that plaintiff's state claims are unrelated to plaintiff's federal claims and, therefore, the court is without supplemental jurisdiction. Second, defendant argues that even if the court has supplemental jurisdiction, plaintiff's state claims substantially predominate the federal claims and the court should decline to exercise jurisdiction.

Defendant's first argument confuses "derive from" with "arises out of." Even though the facts that would support plaintiff's federal claims differ from those that would support plaintiff's state claims, that does not mean that they do not derive from the same nucleus of operative fact. Plaintiff's state claims for breach of contract based on CYA's investment in Black Gold and ISIS, and breach of fiduciary duty against Freeman can be traced to the alleged securities fraud that forms the basis of plaintiff's federal claims. Moreover, state claims for breach of a limited liability company membership contract and breach of fiduciary duty related to management of the company would ordinarily be tried with federal claims for securities fraud when the securities fraud allegedly induced the contractual relationship. Plaintiff's state and federal claims therefore derive from a common nucleus of operative fact, and the court has supplemental jurisdiction over plaintiff's state claims.

Defendants argue that the state claims predominate plaintiff's federal claims and therefore the court should decline to exercise supplemental jurisdiction. Defendants' argument is conclusory-they do not articulate which claim predominates or how. The primary case cited by defendants as support for their position, Stevedoring Svcs. of Am. v. Eggert, involved original federal jurisdiction over an administrative order requiring payment of $60 in attorney's fees and the erroneous exercise of supplemental jurisdiction over state claims to recover $96,551.55 in alleged overcompensation. It is not clear that plaintiff's state claims in this case, even if considered in the aggregate, would substantially predominate over plaintiff's federal securities fraud claims. Certainly, it is not such a clear cut situation that the exercise of supplemental jurisdiction would be inappropriate.

V. CONCLUSION

For the reasons above, defendants' motion at docket 8 to dismiss plaintiff's state law claims for breach of contract, breach of fiduciary duty, and accounting for lack of subject matter jurisdiction pursuant to Rule 12(b)(1) is DENIED.

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JOHN W. SEDWICK

UNITED STATES DISTRICT JUDGE