Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-04857/USCOURTS-cand-3_06-cv-04857-1/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1452 R&amp;R re motions to remand (non-core)

---

United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

ERIC PARKE; ANDREW SCHULTZ; and

ROYAL SLEEP CLEARANCE CENTER,

INC., on behalf of themselves, all others

similarly situated, and in the interest of the

general public of the State of California,

Plaintiffs,

 v.

CARDSYSTEMS SOLUTIONS, INC.;

MERRICK BANK CORPORATION; VISA

INTERNATIONAL SERVICE

ASSOCIATION; VISA U.S.A., INC.;

MASTERCARD INTERNATIONAL

INCORPORATED; and DOES 1-200,

Defendants. /

No. C 06-04857 WHA

ORDER GRANTING

DEFENDANTS’ MOTION 

TO REMAND, DENYING

PLAINTIFFS’ MOTION 

TO TRANSFER, AND 

VACATING HEARING

INTRODUCTION

This Court is essentially serving as junction point in this action. This order must

determine whether to remand this action to San Francisco Superior Court, to transfer the action

to the United States District Court for Arizona so as to allow consolidation with bankruptcy

proceedings involving debtor-defendant Cardsystems Solutions, Inc., or to send some parties

one way and other parties another. This order finds that while federal-subject-matter

jurisdiction exists under the bankruptcy-removal provision, 28 U.S.C. 1452, equitable factors

require remand of this entire action to state court. Accordingly, defendants’ motion to remand

is GRANTED, and plaintiffs’ motion to transfer is DENIED.

Case 3:06-cv-04857-WHA Document 34 Filed 10/11/06 Page 1 of 10
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

STATEMENT

On June 27, 2005, plaintiffs filed this putative-class action on behalf of “all others

similarly situated in California” in California Superior Court for the County of San Francisco

(Compl. ¶ 1). The complaint named as defendants Cardsytems, Merrick Bank Corporation,

Visa International Service Association, Visa U.S.A., Inc., and Mastercard International

Incorporated. The Visa defendants are headquartered in California. The other defendants are

based elsewhere.

According to the complaint, “[t]his action arises from Cardsystems failure to maintain

adequate computer data security of consumer credit card data and the reasonably foreseeable

exploitation of such inadequate security at defendant Cardsystems by computer ‘hackers,’

causing the compromise of the privacy of private information of approximately Forty (40)

Million consumer credit card account holders” (ibid.). This information purportedly related to

information pertaining to these consumers’ accounts with Visa and Mastercard (id. at ¶ 3). 

Merrick Bank “was in the business of providing credit card merchant and processing services

for credit cards used by consumers in the State of California, the United States and abroad,

owned and controlled Cardsystems Solutions, Inc. and ‘subcontracted’ its payment processing

to them” (id. at ¶ 16). According to plaintiffs’ complaint, Visa and Mastercard were liable in

failing to prevent and disclose the security breaches occurring at Cardsystems, about which they

knew or should have known (id. ¶ 5).

The complaint listed seven claims, all based on California law: (1) violation of

California Civil Code § 1798.81.5(b); (2) violation of California Civil Code § 1798.81.5(c); (3)

violation of California Civil Code § 1798.81; (4) violation of California Civil Code 1798.82; (5)

negligence; (6) violation of California Business & Professions Code § 17200; and (7) violation

of California Code of Civil Procedure § 1060. The California Civil Code sections listed

comprise California’s recently enacted regime to protect financial privacy.

On August 8, 2005, this action was assigned to the San Francisco Superior Court’s

Complex Litigation Department, specifically the Honorable Richard A. Kramer. Judge Kramer

issued several substantive orders in this action. On October 18, 2005, Judge Kramer denied

Case 3:06-cv-04857-WHA Document 34 Filed 10/11/06 Page 2 of 10
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

plaintiffs’ request for a temporary restraining order and for a preliminary injunction requiring

Visa and Mastercard to notify all customers whose account information was jeopardized by the

purported breach at Cardsystems. Also on October 18, Judge Kramer sustained the defendants’

demurrers to all of the claims brought by plaintiff Royal Sleep. Again on October 18, Judge

Kramer denied plaintiffs’ motion to compel various discovery and deposition requests. 

Additionally, Judge Kramer held several case management conferences. Discovery and

depositions were conducted. On May 5, 2006, Judge Kramer ordered defendants’ to

supplement their discovery productions.

On May 12, 2006, Cardsystems instituted Chapter 11 bankruptcy in United States

Bankruptcy Court for the State of Arizona. Merrick Bank appeared as a creditor in the

bankruptcy proceedings. Visa and Mastercard have not appeared as creditors or otherwise in

the bankruptcy proceedings to date and assert that they have “no present intention to appear in

the proceeding as creditors” (Br. 7; Masterson Decl. ¶ 4; Whitecotton Decl. ¶¶ 3–4; Hastings

Decl. ¶ 3). On May 15, Cardsystems filed a notice of stay of these proceedings with respect to

it.

On August 10, 2006, plaintiffs removed this action to federal court pursuant to 28

U.S.C. 1452, the removal provision for actions “related to” bankruptcy proceedings. Plaintiffs

now seek to transfer this action to the United States District Court for the District of Arizona, so

that this action can be consolidated with the Cardsystems bankruptcy proceedings. Defendants,

in turn, seek to remand this action to state court on the grounds that this court lacks

subject-matter jurisdiction and on equitable grounds.

ANALYSIS

In this circuit a court must determine whether or not it has subject-matter jurisdiction

before considering whether the venue is proper. See Bookout v. Beck, 354 F.2d 823, 825

(9th Cir. 1965) (“jurisdiction must be first found over the subject matter and the person before

one reaches venue”); Abrams Shell v. Shell Oil Co., 165 F. Supp. 2d 1096, 1103 (C.D. Cal.

2001) (“A court may not transfer an action for improper venue unless it has subject matter

jurisdiction”); see also Neirbo Co. v. Bethlehem Shipbuilding Corp., 308 U.S. 165, 168 (1939)

Case 3:06-cv-04857-WHA Document 34 Filed 10/11/06 Page 3 of 10
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

*

 It is worth noting that federal subject-matter jurisdiction over this putative-class action does not exist

under the Class Action Fairness Act, 28 U.S.C. 1332(d). CAFA does not apply to actions such as this one

involving a class composed exclusively of California residents, a defendant that is a California resident (Visa),

alleged injuries relating to conduct occurring in California, and no other pending, related class actions. 

28 U.S.C. 1332(d)(4).

4

(“This basic difference between the court’s power and the litigant’s convenience is historic in

the federal courts”).

1. MOTION TO REMAND.

With the above principle in mind, this order first addresses defendants’ motion to

remand. The preliminary inquiry for the motion to remand is whether there is subject-matter

jurisdiction in the federal courts under 28 U.S.C. 1452. Even if there is such jurisdiction,

however, this order must weigh certain equitable factors to determine if remand is nonetheless

appropriate. In determining the existence of removal jurisdiction, “the court must look to the

complaint as of the time the removal petition was filed. Jurisdiction is based on the complaint

as originally filed and not as amended.” Abada v. Charles Schwab & Co., Inc., 300 F.3d 1112,

1117 (9th Cir. 2002) (internal citation omitted) (emphasis in original).*

A. Jurisdiction under 28 U.S.C. 1452.

Section 1452 provides for “removal of claims related to bankruptcy cases.” Under

Section 1452(a), “[a] party may remove any claim or cause of action in a civil action . . . to the

district court for the district where such civil action is pending, if such district court has

jurisdiction of such claim or cause of action under section 1334 of this title.” Here, the crucial

question in determining the propriety of removal jurisdiction under Section 1452(a) is whether

the action is “related to” a bankruptcy case. The Ninth Circuit has adopted the following test,

first articulated by the Third Circuit, for relatedness:

The usual articulation of the test for determining whether a civil

proceeding is related to bankruptcy is whether the outcome of the

proceeding could conceivably have any effect on the estate being

administered in bankruptcy. Thus, the proceeding need not

necessarily be against the debtor or against the debtor’s property. 

An action is related to bankruptcy if the outcome could alter the

debtor’s rights, liabilities, options, or freedom of action (either

positively or negatively) and which in any way impacts upon the

handling and administration of the bankrupt estate.

Case 3:06-cv-04857-WHA Document 34 Filed 10/11/06 Page 4 of 10
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

Fietz v. Great W. Sav., 852 F.2d 455, 457 (9th Cir. 1988) (quoting Pacor, Inc. v. Higgins, 743

F.2d 984, 994 (3d Cir. 1984)) (emphasis in original). Indeed, the Fietz court made clear it was

adopting the most expansive reading of Pacor, rejecting opinions from other circuits that had

denied jurisdiction where only a “remote” relationship between the civil action and the

bankruptcy proceeding existed. Under Fietz, even a remote relationship confers “related to”

jurisdiction under Section 1452.

Under this expansive view of relatedness, the outcome of the instant action “could

conceivably have any effect on the estate being administered in bankruptcy.” Clearly, the

claims against defendant Cardsystems may have some effect on the estate. To the extent

Cardsystems is liable for damages in this action, the estate could be taxed, perhaps even

significantly given the potentially large scope of the putative class. Similarly, Merrick Bank

allegedly “owned and controlled” Cardsystems, rendering any potential liability against it

pertinent to the status of the debtor Cardsystems’ estate (Compl. ¶ 16). Moreover, Merrick

Bank filed as a creditor in the bankruptcy proceedings, demonstrating its vested interest in the

available assets of the estate.

Visa and Mastercard argue that even if plaintiffs’ claims against Merrick Bank and

Cardsystems relate to the bankruptcy proceedings, the same claims against Mastercard and Visa

do not. The credit-card companies rely on the fact that they are not currently creditors in the

bankruptcy proceeding, although they only go so far as to state they have “no present intention

to be creditors” (Br. 7). Regardless, of whether the credit-card companies are currently

participating in the bankruptcy proceedings or not, there is at least a conceivable effect that

liability against Visa and Mastercard would have upon the bankruptcy proceedings. This

conceivable effect is the possibility that Cardsystems would be called to indemnify Visa and

Mastercard for any damages the credit-card companies ultimately incur as a result of this action. 

Visa and Mastercard acknowledge that they have indemnification agreements with

Merrick Bank, but dispute the relevance of these agreements to determining the potential effect

on Cardsystems’ bankruptcy. The credit-card companies’ argument is unpersuasive for two

Case 3:06-cv-04857-WHA Document 34 Filed 10/11/06 Page 5 of 10
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

reasons. First, according to the complaint, Merrick Bank owns Cardsystems. It is plausible that

the indemnification duty owed by Merrick Bank could extend to its subsidiaries.

Second, in any event, recent case law suggests that the possibility of indemnification or

contribution by the debtor, even in the absence of a formal indemnification agreement,

constitutes a conceivable effect so as to trigger “related to” jurisdiction under Section 1452. 

See In re Sizzler Rests. Int’l, Inc., 262 B.R. 811, 818–19 (Bankr. C.D. Cal. 2001) (“While

Sizzler’s duty to indemnify is not based on an unconditional contractual obligation, this court is

persuaded by those cases which have refused to read Pacor as requiring an unconditional

indemnification agreement”); Williams v. Shell Oil Co., 169 B.R. 684, 690 (S.D. Cal. 1994)

(“unlike the defendants in Pacor, Brass and Celanese have entered into a sharing agreement by

which Brass agreed, prior to bankruptcy, to indemnify Shell and Celanese”). Here, there

appears to be an applicable indemnification agreement between the credit-card companies and

the debtor’s parent. Even in the absence of such an agreement, however, the reasoning of

Sizzler shows that a finding of relatedness would still be appropriate given the possible duty to

indemnify under principles of equitable contribution.

B. Remand on Equitable Grounds.

“[E]ven where federal jurisdiction attaches in actions ‘related to’ bankruptcy

proceedings, Congress has explicitly provided for courts to find that those matters are more

properly adjudicated in state court.” Williams, 169 B.R. at 690. Section 1452(b) provides for

such equitable remand:

The court to which such claim or cause of action is removed may

remand such claim or cause of action on any equitable ground. 

An order entered under this subsection remanding a claim or

cause of action, or a decision to not remand, is not reviewable by

appeal or otherwise by the court of appeals under section 158(d),

1291, or 1292 of this title or by the Supreme Court of the United

States under section 1254 of this title.

Courts have identified the following non-exclusive list of factors as relevant to determining

whether to remand on equitable grounds: (1) the effect of the action on the administration of

the bankruptcy estate; (2) the extent to which the issues of state law predominate; (3) the

difficulty of applicable state law; (4) comity; (5) the relatedness or remoteness of the action to

Case 3:06-cv-04857-WHA Document 34 Filed 10/11/06 Page 6 of 10
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

the bankruptcy case; (6) the existence of a right to jury trial; and (7) prejudice to the party

involuntarily removed from state court. See Hopkins v. Plant Insulation Co., __ F. Supp.

2d __, 2006 WL 2130740, at *7 (N.D. Cal. July 27, 2006); Williams, 169 B.R. at 692–93.

Applying the preceding factors to the instant action, this order holds that remand to the

state court is appropriate. Most significantly here, plaintiffs’ putative-action exclusively

involves issues of state law. All seven of plaintiff’s claims were brought under California

common or statutory law. No federal claims were asserted. Moreover, plaintiffs’ claims are not

run-of-the-mill state claims. Several of plaintiffs’ claims implicate complicated issues of

financial privacy on which the California courts have yet to rule. Plaintiffs brought claims

under California Civil Code §§ 1798.181.5(b), 1798.81.5(c), 1798.81, and 1798.82, provisions

of the financial-privacy regime enacted by the California legislature over the last six years. 

There appears to be no reported appellate decisions interpreting these code provisions. “[W]hen

a state court proceeding sounds in state law and bears a limited connection to a debtor’s

bankruptcy case, abstention is particularly compelling.” Citigroup, Inc. v. Pac. Inv. Mgmt. Co.,

296 B.R. 505, 509 (C.D. Cal. 2003) (internal citation omitted).

Adding to the above considerations, the putative plaintiffs are, by definition, California

residents. “Comity dictates that California courts should have the right to adjudicate the

exclusively state law claims involving California-centric plaintiffs and California-centric

transactions.” Citigroup, 296 B.R. at 509.

Furthermore, there is little relation between the bankruptcy proceedings and plaintiffs’

putative-class action. This action involves questions of disclosure of private information

brought against several defendants, only one of whom is a debtor. The credit-card companies,

at least as the present moment, are not even involved in the bankruptcy proceedings. A transfer

order, therefore, would have the effect of requiring the bankruptcy court to resolve

non-bankruptcy claims against non-debtor parties. The case law advises against such a result. 

“[T]he potential danger arises that the court will be forced to resolve non-bankruptcy related

issues between non-debtors. The courts have uniformly held that a bankruptcy court should

Case 3:06-cv-04857-WHA Document 34 Filed 10/11/06 Page 7 of 10
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

avoid such a situation.” Western Helicopters, Inc. v. Hiller Aviation, Inc., 97 B.R. 1, 6 (E.D.

Cal. 1988) (citations omitted).

Remand also avoids a waste of judicial resources. As stated above, the San Francisco

Superior Court already devoted over a year of its time to this action. During that period, the

state court issued substantive rulings on plaintiffs’ request for temporary and injunctive relief,

as well as on defendants’ demurrers. The state court also exhausted resources on case

management and on discovery disputes. Failing to remand will require a new court to expend

resources getting up to speed on an action that has been pending for over a year, a result that

should be avoided. See, e.g., TIG Ins. Co. v. Smolker, 264 B.R. 661, 667 (Bakr. C.D. Cal. 2001)

(“The Los Angeles Superior Court, having devoted many hours to the resolution of disputes in

this matter over the course of the last several years, is the most appropriate forum for the parties

to litigate these claims”). Moreover, transfer at this late juncture could yield inconsistent

results, such as if the bankruptcy court granted injunctive relief. There does not seem to be any

concurrent benefit to the efficient administration of the bankruptcy estate — adding these

complicated state claims will only muddle the bankruptcy proceedings. See, e.g., Western

Helicopters, 97 B.R. at 7 (“In addition to the unnecessary expense and expenditure of

duplicative judicial resources, bifurcating this civil claim creates the real danger of inconsistent

results. Such a risk should be avoided if there are no countervailing benefits”); Williams, 169

B.R. at 693 (finding that the consolidation of products-liability claims with the bankruptcy

proceedings “would unduly burden the administration of the bankruptcy estate”).

Finally, the non-debtor defendants will be prejudiced in the absence of a remand. These

defendants have spent considerable resources defending this action in state court, including

engaging in motion practice and conducting discovery. The non-debtor defendants will have to

hire new counsel competent to practice in Arizona, and this new counsel will have to expend

time and resources learning the case. This prejudice weighs in favor of equitable remand. 

See, e.g., TIG, 264 B.R. at 667 (“The parties to the Action [other than the debtor] would be

significantly prejudiced if they were required to begin the education process anew with a new

judge in a new court”).

Case 3:06-cv-04857-WHA Document 34 Filed 10/11/06 Page 8 of 10
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9

* * *

In cases where equitable remand is appropriate such as this one, courts have found

remand appropriate as to all defendants, rather than as to exclusively the non-debtor defendants. 

For example in TIG, the district court found that where the claims against the debtors and

non-debtors alike were based entirely on state law and where significant resources had been

exhausted in state court as to claims against both sets of defendants, complete remand was

appropriate. TIG, 264 B.R. at 667; see also Williams, 169 B.R. 694.

So too here. The state court expended over a year adjudicating the claims against

Cardsystems alongside the claims against defendants Visa, Mastercard, and Merrick Bank. The

claims against Cardsystems involve the same novel and complicated issues of state law

described above. The only difference is the absence of prejudice to Cardsystems, since

Cardsystems already has to participate in the Arizona bankruptcy proceedings. This lack of

prejudice does not mean, however, that somehow plaintiffs would benefit by splitting the two

actions. On the contrary, the division of this action into two classes of defendants would

compound the potential waste of resources that can only be avoided by remand. It would also

heighten the risk of inconsistent results. This order thus finds that equitable remand is

appropriate as to all defendants.

2. MOTION TO TRANSFER.

Having concluded that this action should be remanded in its entirety to the San

Francisco Superior Court on equitable grounds, nothing remains of this action to be transferred

to Arizona. See, e.g., TIG, 264 B.R. at 667. Plaintiffs’ motion to transfer, therefore, is DENIED.

Case 3:06-cv-04857-WHA Document 34 Filed 10/11/06 Page 9 of 10
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

10

CONCLUSION

For the foregoing reasons, defendants’ motion to remand is GRANTED and plaintiffs’

motion to transfer is DENIED. The Clerk shall send the entire file to San Francisco Superior

Court immediately. Finding no further argument necessary, the hearing on this motion is

hereby VACATED.

IT IS SO ORDERED.

Dated: October 11, 2006 

WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

Case 3:06-cv-04857-WHA Document 34 Filed 10/11/06 Page 10 of 10