the parties with Judge Goettel concerning plaintiff's Rule 23.2
motion, the court holds: (1) Shlomchik properly sought to bring
this case as a rule 23.2 class action; and (2)
recharacterization of the derivative action as a class action
and dropping R 103 as a party-defendant would be appropriate.
Curley, 915 F.2d at 87-8. However, such "major surgery" a la
Curley is unnecessary at this juncture in view of the
conclusion, infra, that the court has pendent jurisdiction.
Federal Question and Pendent Jurisdiction
We reach plaintiff's argument that assuming the absence of
diversity jurisdiction, there is in any event, pendent
jurisdiction over the state law claims in this case. The court
As it was determined in the decision of December 15, 1986, 662
F. Supp. at 370, that this court has diversity jurisdiction
pursuant to 28 U.S.C. § 1332(a) and federal question
jurisdiction pursuant to the Securities Exchange Act of 1934, §§
10(b), 27, 15 U.S.C. § 78j(b) and 78aa, Rule 10-5, and
28 U.S.C. § 1331, the question of "pendent jurisdiction" was not
reached, and consequently must now be addressed.
Plaintiff argues that its federal question (i.e., securities)
claims in the complaint give the court "pendent jurisdiction"
over all of plaintiff's state law claims since both the federal
and state claims arise out of a common nucleus of facts, and
therefore should be tried in a single case.
Defendants, on the other hand, vigorously urge dismissal of
this action for lack of subject matter jurisdiction because
plaintiff's federal claims are constitutionally insubstantial
and unsubstantiated, "bordered on the frivolous," the state law
claims so heavily predominate over the securities claims that
the case is essentially a state claims action that should have
been brought in State court, there is no common nucleus of
operative facts, and plaintiff will suffer no prejudice from
dismissal in this court as he may relitigate his state claims
in a state court (see New York CPLR § 205 (McKinney's).
In the decision of December 15, 1986, plaintiff's securities
claims were summarily rejected on the basis of the finding that
although Huck was misguided as to his lack of authority to make
the secret 1976 exchange of properties, he had no scienter or
intent to defraud Shlomchik or the partnership, but acted in
good faith merely intending to preserve the tax shelter status
of R 103 (662 F. Supp. at 374). Simply because this court
determined in its prior decision that plaintiff failed to
sustain his burden of proving the element of scienter or
fraudulent intent in the exchange of properties, it does not
follow that the securities claim in his complaint was
"unsubstantial" for purposes of pendent jurisdiction over the
state law claims. See Hagans v. Lavine, 415 U.S. 528, 536-37,
94.S.Ct. 1372, 1378-79, 39 L.Ed.2d 577 (1974); Enercomp, Inc.
v. McCorhill Pub., Inc., 873 F.2d 536 (2d Cir. 1989), Mayer
v. Oil Field Systems Corp., 803 F.2d 749, 756-57 (2nd Cir.
1986); and Hirsch v. duPont, 396 F. Supp. 1214, 1229-30
(S.D.N.Y. 1975), aff'd, 553 F.2d 750 (2d Cir. 1977).
Shlomchik's securities law claims were not "constitutionally
insubstantial" in the sense that they were frivolous or beyond
controversy in light of prior decisions (see Goosby v. Osser,
409 U.S. 512, 518, 93 S.Ct. 854, 858, 35 L.Ed.2d 36 (1973)) and
his securities claims were vigorously pursued at trial and
argued in plaintiff's post-trial brief. Further, plaintiff's
causes of action are all predicated on a common nucleus of
operative facts and intertwining occurrences, and should have
been tried in a single judicial proceeding (see United Mine
Workers of America v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130,
1138, 16 L.Ed.2d 218 (1966) Kavit v. A.L. Stamm & Co.,
491 F.2d 1176, 1183-84 (2d Cir. 1974); and Leather's Best, Inc. v.
S.S. Mormaclynx, 451 F.2d 800, 809-11 (2d Cir. 1971).
In United Mine Workers of America v. Gibbs, supra, the
Supreme Court observed:
Pendent jurisdiction, in the sense of judicial power, exists
whenever there is a [federal] claim * * *, and the relationship
between that claim and the state claim permits the conclusion
that the entire action before the court comprises but one
constitutional "case." [footnote omitted.]
The federal claim must have substance sufficient to confer
subject matter jurisdiction on the court. [citation omitted.]
The state and federal claims must derive from a common nucleus
of operative fact. But if, considered without regard to their
federal or state character a plaintiff's claims are such that
he would ordinarily be expected to try them all in one
proceeding, then, assuming substantiality of the federal
issues, there is power in federal courts to hear the whole.
383 U.S. at 725, 86 S.Ct. at 1138 (emphasis in original).