Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_07-cv-00660/USCOURTS-cand-3_07-cv-00660-0/pdf.json

Nature of Suit Code: 950
Nature of Suit: Constitutionality of State Statutes
Cause of Action: 28:2201 Declaratory Judgement (Insurance)

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

VIZ MEDIA LLC,

 Plaintiff,

 v.

STEVEN M SPECTOR PC,

Defendant. /

No. C07-00660 MJJ

ORDER GRANTING DEFENDANT’S

MOTION TO DISMISS AND STRIKING

AS MOOT PLAINTIFF’S MOTION FOR

SUMMARY JUDGMENT

INTRODUCTION

Before the Court are Defendant Steven M. Spector, A Professional Corporation’s (“Spector”)

Motion To Dismiss (Docket No. 8) and Plaintiff Viz Media, LLC’s (“Viz”) Motion For Summary

Judgment (Docket No. 9). 

For the following reasons, the Court GRANTS Spector’s motion to dismiss. Accordingly,

the Court STRIKES AS MOOT Viz’s motion for summary judgment.

FACTUAL BACKGROUND

Viz, plaintiff in this declaratory relief action, and Ventura Distribution, Inc. (“Ventura”),

Viz’s former distributor, entered into a consignment agreement in 2003, under which Viz transferred

certain goods to Ventura for sale to Ventura’s customers. In February 2006, to perfect its security

interest in the goods which it had previously delivered to Ventura, Viz filed a form UCC-1 financing

statement with California’s Secretary of State, naming Ventura as a debtor. In March 2006, Viz

brought an action in San Francisco County Superior Court against Ventura alleging breach of

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United States District Court

For the Northern District of California

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contract and related claims against Ventura.

After the lawsuit was filed, in March 2006, Ventura made a purported assignment for the

benefit of its creditors, pursuant to California law, in favor of Spector (defendant in this declaratory

relief action). Spector, as assignee, subsequently sold most of the assets. Spector and Viz

subsequently engaged in discussions relating to their dispute over ownership of the goods for which

Viz claimed a security interest. In January 2007, Spector indicated to Viz that it intended to file a

motion to intervene in the state court action to assert a cause of action against Viz for the avoidance

of the UCC-1 as a preference pursuant to California Code of Civil Procedure § 1800(b), which

confers upon an assignee for the benefit of creditors the right to recover preferential payments and

transfers

On February 7, 2007, Viz filed this federal action, seeking declaratory judgment that

Spector’s alleged power under California Code of Civil Procedure §§ 1800 et seq. to void or

otherwise adversely affect the UCC-1 is preempted by the United States Bankruptcy Act and that

Spector therefore has no rights to the goods in question. On February, 9, 2007, the San Francisco

County Superior Court granted Spector’s motion to intervene in the state court action. That same

day, Spector filed its complaint in intervention in the state court, which included a claim against Viz

for the avoidance of the UCC-1 as a preference. Spector’s state law claim under California Code of

Civil Procedure § 1800(b) against Viz has not been removed to federal court.

In its motion to dismiss, Spector now asserts that this Court does not have subject matter

jurisdiction over Viz’s declaratory judgment action, and that the preemption issue raised by Viz

must be resolved in the state court action. Viz opposes the motion to dismiss. By separate motion,

Viz also seeks summary judgment on its declaratory relief claim, on the grounds that controlling

precedent in Sherwood Partners v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005) has already

determined that the United States Bankruptcy Act preempts California Code of Civil Procedure

Section 1800(b).

LEGAL STANDARD

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For the Northern District of California

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Rule 12(b)(1) authorizes a party to move to dismiss a claim for lack of subject matter

jurisdiction. Federal courts are courts of limited jurisdiction; thus, the Court presumes lack of

jurisdiction, and the party seeking to invoke the court’s jurisdiction bears the burden of proving that

subject matter jurisdiction exists. See Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377

(1994). “Determinations about federal jurisdiction require sensitive judgments about congressional

intent, judicial power, and the federal system.” Merrell Dow Pharm., Inc. v. Thompson, 478 U.S.

804, 810 (1986). 

A party challenging the court's jurisdiction under Rule 12(b)(1) may do so by raising either a

facial attack or a factual attack. See White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000). A facial

attack is one where “the challenger asserts that the allegations contained in a complaint are

insufficient on their face to invoke federal jurisdiction.” Safe Air for Everyone v. Meyer, 373 F.3d

1035, 1039 (9th Cir. 2004). In evaluating a facial attack to jurisdiction, the Court must accept the

factual allegations in plaintiff's complaint as true. See Miranda v. Reno, 238 F.3d 1156, 1157 n. 1

(9th Cir. 2001). For a factual attack, in contrast, the Court may consider extrinsic evidence. See

Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir.1987). Further, the court does not have to

assume the truthfulness of the allegations, and may resolve any factual disputes. See White, 227

F.3d at 1242. Thus, “[o]nce the moving party has converted the motion to dismiss into a factual

motion by presenting affidavits or evidence properly before the court, the party opposing the motion

must furnish affidavits or other evidence necessary to satisfy its burden of establishing subject

matter jurisdiction.” Savage v. Glendale Union High Sch., 343 F.3d 1036, 1039 n.2 (9th Cir. 2003). 

ANALYSIS

A. Declaratory Relief Actions Asserting Preemption.

A district court must have a separate basis for subject matter jurisdiction in a declaratory

judgment action. “The Declaratory Judgment Act, 28 U.S.C. § 2201, is a procedural device only; it

does not confer an independent basis of jurisdiction on the federal court.” Alton Box Board Co. v.

Espirit De. Corp., 682 F.2d 1267, 1274 (9th Cir. 1982). “The use of the declaratory judgment

statute does not confer jurisdiction by itself if jurisdiction would not exist on the face of a wellpleaded complaint brought without the use of 28 U.S.C. § 2201.” Janakes v. United States Postal

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Service, 768 F.2d 1091, 1093 (9th Cir. 1985). “A declaratory judgment plaintiff may not assert a

federal question in his complaint if, but for the declaratory judgment procedure, that question would

arise only as a federal defense to a state law claim brought by the declaratory judgment defendant in

state court.” Id.

Here, it is undisputed that diversity subject matter jurisdiction does not exist, as both Viz and

Spector are California citizens. Viz concedes in its Complaint that Viz is a California limited

liability company with its headquarters and principal place of business in San Francisco, California,

and that Spector is a California corporation with a place of business in Los Angeles. (Complaint ¶

2.) 

The Court’s ability to reach the merits of this action therefore turns on whether the Court has

federal question subject matter jurisdiction over Viz’s declaratory judgment complaint asserting

preemption. Under the “well-pleaded complaint rule”, however, the assertion in a declaratory relief

action of a federal law defense to a state law claim will not, in itself, create federal question subject

matter jurisdiction. Alton Box, 682 F.2d at 1274. In Alton Box, defendant had filed a state court

action against certain manufacturers asserting state antitrust law violations. In response, the

manufacturers filed a separate federal action seeking, inter alia, a declaratory judgment that federal

law preempted the state law antitrust claims. Id. at 1269-70. When the manufacturers moved for

summary judgment, the district court denied the motion and ordered the federal complaint dismissed.

On appeal, the Ninth Circuit ruled that “the district court lacked jurisdiction to enter a

declaratory judgment because the manufacturers’ declarartory judgment complaint raised no federal

question.” Id. at 1274. The Ninth Circuit explained:

The federal preemption issue raised in the manufacturers’ complaint is

a defense to enforcement of Espirit’s [state law antitrust] claim, a

claim which manifestly arises under state law. Such is not the stuff of

federal jurisdiction. . . . A claim does not arise under federal law

within the meaning of section 1331 where it relies on federal law only

to establish an immunity or defense which would preclude the

declaratory judgment defendant from successfully litigating against the

declaratory judgment plaintiff a claim arising under state law.

Id.; accord Franchise Tax Board of the State of California v. Construction Laborers Vacation Trust

for Southern California, 463 U.S. 1, 14 (1983) (“since 1887 it has been settled law that a case may

not be removed to federal court on the basis of a federal defense, including the defense of

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1 Preliminarily, Spector argues that there is no basis to even reach the complete preemption issue, contending

that it is a doctrine limited to the propriety of removal of state actions to federal court, which is not at issue here. The Court

disagrees. Because the complete preemption doctrine, if applicable, would allow this Court to recharacterize Spector’s state

law claims as arising under federal law, the complete preemption doctrine could potentially provide federal question subject

matter jurisdiction for Viz’s instant action seeking declaratory judgment regarding Spector’s state law claims.

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preemption, even if the defense is anticipated in plaintiff’s complaint, and even if both parties admit

that the defense is the only question at issue in the case.”).

Here, Viz’s declaratory relief claim relies on federal law only to establish a defense which

would preclude Spector from successfully litigating against Viz in state court. Under Alton Box,

which this Court determines to be controlling precedent, Viz’s assertion of a declaratory relief claim

based on preemption is, by itself, insufficient to establish federal question subject matter jurisdiction. 

B. The Complete Preemption Doctrine.

Viz argues that this Court nonetheless has federal question subject matter jurisdiction under

the “complete preemption” doctrine. Specifically, VIZ contends that the preemptive force of the

United States Bankruptcy Act requires that Spector’s claim under California Code of Civil

Procedure Section 1800(b) be considered, from its inception, to have arisen under federal law.1

The “complete preemption” doctrine provides an exception to the general proposition that a

complaint purporting to seek relief exclusively under state law does not provide a basis for federal

question subject matter jurisdiction. Where there is “complete preemption” of an area of state law, 

“any complaint that comes within the scope of the federal cause of action necessarily arises under

federal law” even if it purports to raise only state law claims. Franchise Tax Board, 463 U.S. at 24. 

As the Ninth Circuit has observed:

The Supreme Court has concluded that the preemptive force of some

federal statutes is so strong that they “completely preempt” an area of

state law. In such instances, any claim purportedly based on that

preempted state law is considered, from its inception, a federal claim,

and therefore arises under federal law.

In re Miles, 430 F.3d at 1088.

However, complete preemption arises only in “extraordinary” situations. Ansley v.

Ameriquest Mortg. Co., 340 F.3d 858, 862 (9th Cir. 2003). Complete preemption exists only when a

federal statute “wholly displaces the state-law cause of action” such that “the federal statutes at issue

provided the exclusive cause of action for the claim asserted and also set forth procedures and

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28 2 Sherwood Partners had no occasion to discuss the complete preemption doctrine because it is a

jurisdictional concept, and jurisdiction was satisfied by diversity of citizenship in the case before it. 394 F.3d at 1200.

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remedies governing that cause of action.” Beneficial Nat’l Bank v. Anderson, 539 U.S. 1, 8 (2003);

see also In re Miles, 430 F.3d at 1088. As the Ninth Circuit has observed: 

Under “complete or super preemption,” courts have reasoned that, by

legislating within a given area, Congress intended to fully occupy that

area. Thus, any attempt to claim a remedy outside the Congressional

scheme is preempted whether or not there is a direct conflict with state

law. When there is a finding of complete preemption, total occupation

by the federal scheme pushes aside any state law claims in the area. To

the extent that Congress has provided for private remedies, those

remedies become the exclusive remedies available to plaintiffs, which

means that their claims now necessarily arise under federal law. 

Associated Builders & Contractors, Inc. v. Local 302 Intern. Broth. of Electrical Workers, 109 F.3d

1353, 1356 (9th Cir. 1997).

Viz accurately observes that the Ninth Circuit, in Sherwood Partners v. Lycos, Inc., 394

F.3d 1198 (9th Cir. 2005), has found the Bankruptcy Code to substantively preempt California Code

of Civil Procedure 1800(b)’s preference-avoidance powers.2 Viz then points to In re Miles in

support of its contention that the Ninth Circuit has generally “established that the preemptive effect

of the Bankruptcy Code gives rise to complete or ‘super’ preemption” (Viz’s Opposition at 5:26-

28.). However, Viz overstates the holding of In re Miles. In In re Miles, the Ninth Circuit held only

that Congress intended, through Section 303(i) of the Bankruptcy Code, to provide a comprehensive

scheme regarding remedies and sanctions for improper behavior and filings in bankruptcy court, and

that state law remedies were therefore foreclosed. 430 F.3d at 1091-93. However, the Ninth Circuit

specifically observed:

We do not hold that all state actions related to bankruptcy proceedings

are subject to the complete preemption doctrine. We recognize that

because the common law of the various states provides much of the

legal framework for the operation of the bankruptcy system, it cannot

be said that Congress has completely preempted all state regulation

which may affect the actions of parties in bankruptcy court. 

430 F.3d at 1092 (quotations and citations omitted); accord Nelson v. Stewart, 422 F.3d 463, 474-75

(7th Cir. 2005) (holding that Section 1114 of the Bankruptcy Code did not completely preempt state

laws governing the relationship of retirees to the entity representing them before the bankruptcy

court).

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This Court is unable to conclude that Congress intended, by passage of the United States

Bankruptcy Act, to fully occupy the area of the exercise of preference avoidance powers by creditors

or assignees such that “complete preemption” exists here. Even Sherwood Partners, which found

that California’s specific incarnation of an anti-preference provision to be preempted by the

Bankruptcy Code, recognized that federal bankruptcy law “coexists peaceably with, and often

expressly incorporates, state laws regulating the rights and obligations of debtors and creditors.” 

394 F.3d at 1201. The Sherwood Partners court proceeded with a particularized analysis that

examined:

whether the section 1800 assignee’s special avoidance powers, though

not expressly incorporated into the Bankruptcy Code . . . nevertheless

can peaceably coexsit with the federal bankruptcy scheme. To answer

this question we must consider the essential goals and purposes of

federal bankruptcy law, and then determine whether section 1800 is consistent with them.

Id. at 1202. 

Though Sherwood Partners ultimately found Section 1800 to be preempted by federal law as

a result of this analysis (id. at 1206), it recognized that the analysis turned on whether the specific

avoidance rights granted to the assignee conflicted with federal law. This stands in contrast to the

type of situation recognized in Associated Builders & Contractors to potentially support a finding of

complete preemption, where “any attempt to claim a remedy outside the Congressional scheme is

preempted whether or not there is a direct conflict with state law.” 109 F.3d at 1356 (emphasis

added). Indeed, Sherwood Partners observed that had California granted the avoidance rights in

question not only to the assignee but to other unsecured creditors, the remedies provided under state

statute remedies would not have been preempted:

This is not a matter for federal concern when the assignee has no

special avoidance rights. If individual unsecured creditors can sue to

recover preferences under state law, the same powers are also

available to a bankruptcy trustee under section 544(b); there is

obviously no conflict then between federal law and state law giving

those powers to an assignee.

Id. at 1204 n.6. 

This Court concludes that Sherwood Partners, despite its finding of substantive preemption

of California Code of Civil Procedure Section 1800(b), strongly counsels against a finding of

complete preemption for subject matter jurisdiction purposes. As Sherwood Partners recognized,

the Bankruptcy Code will preempt certain preference avoidance powers granted to assignees under

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state statutes when those same powers are not granted to individual creditors under state law, but

still permits some state law preference avoidance powers if granted in equal measure to individual

creditors. 394 F.3d at 1204 n.6, see also In re Wisconsin Builders Supply, 239 F.2d 649, 654-55 (7th

Cir. 1956) (finding Wisconsin’s voluntary assignment statutes, including anti-preference provisions,

not to be preempted by the Bankruptcy Code). Thus, the Bankruptcy Code does not provide the

exclusive private remedies available to assignees (or creditors) for avoidance of preferential

transfers, and does not evidence an intent of Congress to “push aside any state law claims in the

area” nor to make all claims for avoidance of preferential transfers arise solely under federal law. 

See Beneficial Nat’l Bank, 539 U.S. 1 at 8, Associated Builders & Contractors,109 F.3d at 1356. 

Accordingly, a finding of complete preemption is not appropriate.

C. The Embedded Federal Issue Doctrine.

Alternatively, Viz contends that this Court has subject matter jurisdiction under the

“embedded federal issue” doctrine. Under the doctrine, state law claims can confer federal

jurisdiction if they “necessarily raise a stated federal issue, actually disputed and substantial, which a

federal forum may entertain without disturbing any congressionally approved balance of federal and

state judicial responsibilities.” Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S.

308, 314 (2005). 

Viz argues that because Spector’s threats to invoke California Code of Civil Procedure

1800(b) raises a conflict with the Bankruptcy Code, this Court is the proper forum for deciding the

preemption issues controlled by federal law. This Court disagrees. The state law claims discussed

in Grable that gave rise to federal jurisdiction did so because resolution of a federal law question

was needed to determine “essential parts of the plaintiffs’ cause of action.” 545 U.S. at 315. In

contrast, here, no part of Spector’s state law cause of action brought under California Code of Civil

Procedure 1800(b) raises a federal law issue. Instead, Viz’s preemption assertions are raised purely

defensively in connection with Spector’s state law claims. Grable provides no basis for finding

federal jurisdiction on the basis of federal defenses alone. Indeed, to find otherwise would create

federal subject matter jurisdiction all of the tremendous number of lawsuits where a preemption

defense is raised in defense to state court claims. Grable does not permit this Court to assert

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jurisdiction under the “embedded federal issue” doctrine on such a basis, particularly where such a

rule of law would cause a large disturbance to the balance of federal and state judicial

responsibilities and “materially affect, or threaten to affect, the normal currents of litigation.” Id. at

319.

CONCLUSION

For the foregoing reasons, the Court GRANTS Spector’s motion to dismiss. Because the

Court determines that it does not have subject matter jurisdiction, the Court STRIKES AS MOOT

Viz’s motion for summary judgment. The court emphasizes that the above conclusions go only to

the question of the subject matter jurisdiction of this Court and not to the merits of any defense

raised by Viz to Spector’s state-law claims are preempted by the Bankruptcy Code. The conclusions

stated herein are not binding on any state court called upon to resolve the merits of such a defense.

IT IS SO ORDERED.

Dated: 

MARTIN J. JENKINS

UNITED STATES DISTRICT JUDGE

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