Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_12-cv-00212/USCOURTS-azd-2_12-cv-00212-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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UNITED STATES DISTRICT COURT

DISTRICT OF ARIZONA

CYA OIL & GAS INVESTMENTS, )

LLC, )) Plaintiff, ) 2:12-cv-00212 JWS ) vs. ) ORDER AND OPINION ) ISIS, LLC OF OKLAHOMA, et al., ) [Re: Motion at Docket 8] ) Defendants. ))

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.1

 Plaintiff CYA

Oil & Gas Investments, LLC (“CYA” or “plaintiff”) opposes the motion at docket 14. 

1

The motion states that defendants are moving pursuant to Rule 12(b)(6), but it is clear

that defendants are asking the court to decline to exercise supplemental jurisdiction over

plaintiff’s state law claims.

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Defendant’s reply is at docket 17. Oral argument was requested but would not assist

the court.

II. BACKGROUND2

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 2009.3

 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

2

This background is taken from the complaint at docket 1.

3

It is not clear from the complaint whether CYA invested $655,000 in ISIS and another

$655,000 in Black Gold or whether $655,000 was CYA’s total investment.

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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.4 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.5 The court does not, however, accept the truth of legal conclusions cast

in the form of factual allegations.6

4

Tosco v. Cmtys. for a Better Env’t, 236 F.3d 495, 499 (9th Cir. 2000).

5

Doe v. Holy See, 557 F.3d 1066, 1073 (9th Cir. 2009).

6

Id.

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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.”7

 “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.”8

 A district court may nonetheless decline to exercise supplemental

jurisdiction over state claims if the state claims “substantially predominate” over the

federal claims.9

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

7

28 U.S.C. § 1367(a).

8

Bahrampour v. Lampert, 356 F.3d 969, 978 (9th Cir. 2004).

9

28 U.S.C. § 1367(c)(2).

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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,

10 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.11 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.

DATED this 4th day of June 2012.

 /s/ 

JOHN W. SEDWICK

UNITED STATES DISTRICT JUDGE

10953 F.2d 552 (9th Cir. 1992).

11Id. at 554, 558.

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