Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_05-cv-00025/USCOURTS-cand-5_05-cv-00025-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Other Contract

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Case No. C-05-25-JF / C-05-26-JF

ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

**E-Filed 7/5/05**

NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

DANIEL SPRINGER,

 Plaintiff,

 v.

ERNST & YOUNG, LLP, et al.,

 Defendants.

_________________________________________

RICHARD GOEBEL, 

 Plaintiff,

 v.

ERNST & YOUNG, LLP, et al.,

 Defendants.

Case Number C-05-25-JF

Case Number C-05-26-JF

ORDER GRANTING PLAINTIFFS’

MOTIONS TO REMAND

Before the Court are motions to remand brought by the plaintiffs in two related actions,

Daniel Springer v. Ernst & Young, LLP, Case No. C-05-25-JF, and Richard Goebel v. Ernst &

Young, LLP, Case No. C-05-26-JF. The Court has considered the briefing of the parties as well
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Case No. C-05-25-JF / C-05-26-JF

ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

as the oral arguments presented at the hearing on April 29, 2005. For the reasons discussed

below, the motions will be granted.

I. BACKGROUND

The instant actions arise out of Plaintiffs’ separation from employment with NextCard,

Inc. (“NextCard”). NextCard was an Internet-based provider of consumer credit that offered an

online credit approval system for a Visa card through its wholly-owned subsidiary, NextBank. 

Plaintiffs Daniel Springer (“Springer”) and Richard Goebel (“Goebel”) were employed by

NextCard at its headquarters in San Francisco.

Separation From Employment:

Springer alleges that he decided to leave NextCard in June 2000 but that he agreed to stay

until a smooth transition of duties could be achieved. He further alleges that he entered into a

separation agreement effective September 1, 2000, which provided among other things that: (1)

he would be paid $25,000; (2) his unvested stock options for approximately 150,000 shares

would vest eighteen months after the effective date of the separation agreement; (3) he would not

to sell his existing NextCard shares until one year after the effective date of the separation

agreement or until the stock reached at least $20 per share; and (4) he would release any

employment-related claims he might have against NextCard and its officers, directors,

employees, attorneys, subsidiaries, affiliated companies and successors in interest.

Goebel alleges that in March 2001 he was informed that his position with NextCard was

being eliminated. He was offered a choice between accepting a demotion or terminating his

employment with a separation agreement. He entered into the separation agreement, which

provided among other things that: (1) he would receive three months salary as severance pay and

limited continued medical coverage; (2) he would receive stock options for approximately 35,000

shares, exercisable one year after execution of the separation agreement; and (3) he would release

any employment-related claims he might have against NextCard and its directors, employees and

agents.

NextCard’s Delaware Bankruptcy Action:

On October 31, 2001, NextCard announced that NextBank was substantially increasing
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Case No. C-05-25-JF / C-05-26-JF

ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

loan loss allowances, tightening underwriting criteria by limiting new account originations to

FICO scores above 680, suspending other lending activities, reclassifying previously recognized

fraud losses as credit losses and increasing risk weighted assets by more than $500 million. 

NextCard’s stock declined 84% to less than a dollar a share on this news. On February 7, 2002,

the Office of the Comptroller of the Currency (“OCC”) closed NextBank and appointed the FDIC

as receiver. NextCard filed a Chapter 11 bankruptcy action in the United States Bankruptcy

Court for the District of Delaware (“Delaware Bankruptcy Court”) on November 14, 2002. The

case was converted to a Chapter 7 case and remains pending in the Delaware Bankruptcy Court.

Proofs Of Claim In Delaware Bankruptcy Action: 

Springer and Goebel filed proofs of claim in the NextCard bankruptcy action on March

26, 2003 and March 27, 2003, respectively, alleging claims for fraud, breach of fiduciary duty

and breach of contract against individual NextCard officers and directors. Each also served a

notice upon NextCard purporting to rescind their separation agreements; unless rescinded, those

agreements bar the assertion of claims against NextCard’s officers and directors.

San Francisco Action:

On October 30, 2003, Springer and Goebels filed separate complaints in the San

Francisco Superior Court, asserting fraud and related claims against individual NextCard officers

and directors and seeking rescission of their separation agreements. NextCard was not named as

a defendant in these actions because of the bankruptcy stay. The defendant officers and directors

removed the actions to the United States Bankruptcy Court for the Northern District of

California, San Francisco Division (“San Francisco Bankruptcy Court”), asserting that the

actions involved core bankruptcy proceedings or at least were “related to” the Delaware

bankruptcy. The defendant officers and directors then moved to dismiss the actions, asserting

that NextCard was an indispensable party because it was a party to the separation agreements, but

that NextCard could not be joined in light of the automatic bankruptcy stay. The defendant

officers and directors also asserted that Plaintiffs had failed to plead fraud with sufficient

particularity. Springer and Goebels both moved for remand to the San Francisco Superior Court. 

They did not challenge the San Francisco Bankruptcy Court’s jurisdiction, but requested remand
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 The automatic stay does not preclude the filing of a complaint against a debtor in the

court where the debtor filed bankruptcy.

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Case No. C-05-25-JF / C-05-26-JF

ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

on equitable grounds pursuant to 28 U.S.C. § 1452.

The San Francisco Bankruptcy Court dismissed the actions against NextCard’s officers

and directors for failure to join NextCard as an indispensable party, but left open the question of

whether leave to amend to add NextCard would be granted if Springer and Goebels could obtain

relief from the bankruptcy stay. The court denied the motion to dismiss for failure to plead fraud

with sufficient particularity. Finally, the court denied the motion for remand without prejudice. 

Springer and Goebels then unsuccessfully sought relief from stay in the Delaware Bankruptcy

Court. 

Complaints In Delaware Bankruptcy Court:

On November 1, 2004, Springer and Goebels filed separate complaints in the Delaware

Bankruptcy Court against the same officers and directors they had sued in the San Francisco

Action. Plaintiffs also named NextCard as a defendant with respect to claims for rescission of

their separation agreements.1 Those actions remain pending.

Instant Actions Against Ernst & Young And Its Employees:

Springer and Goebels then filed separate complaints in the San Francisco Superior Court

against NextCard’s outside auditor, Ernst & Young, LLP, and three of its individual employees

(collectively “E&Y”), asserting fraud and related claims based upon E&Y’s alleged accounting

improprieties. E&Y removed the complaints to this Court on January 3, 2005 pursuant to 28

U.S.C. § 1452(a), based upon its assertion that the actions are “related to” NextCard’s

bankruptcy. Springer and Goebels seek remand to the San Francisco Superior Court.

II. DISCUSSION

(A) Appropriate Court To Decide Plaintiffs’ Remand Motions

Plaintiffs assert that their state court actions properly should have been removed to the

bankruptcy court rather than the district court and request that this Court refer their remand

motions to the San Francisco Bankruptcy Court for disposition. This Court’s Bankruptcy Local
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 The Court notes that Plaintiffs have demanded a jury trial and do not consent to a jury

trial in the bankruptcy court. Consequently, even if this Court were to transfer the actions to the

bankruptcy court for disposition of the remand motions and those motions were denied, the

actions would be transferred back to this court to be litigated.

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ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

Rules contain a general reference to the bankruptcy court for all civil proceedings arising under

Title 11 or arising in or related to a case under Title 11. Bank. L. R. 5011-1(a). Because E&Y

removed the actions on the basis of “related to” jurisdiction, it appears that the matter should

have been referred to the bankruptcy court at the time of removal. However, that did not occur,

and this Court has expended significant time and effort in familiarizing itself with the

complicated procedural background of the cases, reviewing the parties’ contentions and the

applicable law, and conducting a hearing. Under these circumstances, considerations of

timeliness and judicial economy lead the Court to conclude that it should decide the pending

remand motions rather than transferring the actions to the bankruptcy court. Even if the Court

had referred the actions to the bankruptcy court, such referral could have been withdrawn at the

Court’s discretion. 28 U.S.C. § 157(d); Bank. L. R. 5011-2. At the hearing, Plaintiffs’ counsel

conceded that this Court has jurisdiction to decide the remand motions. The Court therefore will

proceed to consideration of the remand motions.2

(B) Motions For Remand

Plaintiffs argue that the actions must be remanded because this Court lacks subject matter

jurisdiction. Alternatively, Plaintiffs argue that if subject matter jurisdiction exists, the actions

should be remanded on equitable grounds.

1. Subject Matter Jurisdiction

E&Y removed the instant actions pursuant to 28 U.S.C. § 1452(a), permitting removal of

claims over which the district court has jurisdiction under 28 U.S.C. § 1334. Section 1334(b)

confers upon district courts original but not exclusive jurisdiction over “all civil proceedings

arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). 

Proceedings “arising under” Title 11 are those proceedings involving a cause of action created or

determined by a statutory provision of Title 11. In re Harris Pine Mills, 44 F.3d 1431, 1435 (9th
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ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

Cir. 1995). Proceedings “arising in” Title 11 cases are those administrative matters arising only

in bankruptcy cases. Id. Proceedings “related to” Title 11 cases are those proceedings that

conceivably could have any effect on an estate being administered in bankruptcy. In re Fietz,

852 F.2d 455, 457 (9th Cir. 1988).

In its papers, E&Y asserts that Plaintiffs’ actions against it are “related to” the NextCard

bankruptcy for the following reasons: (1) E&Y will assert an equitable contribution claim

against NextCard in the event E&Y is found liable to Plaintiffs; (2) a state court action might

impose discovery burdens on the debtor, NextCard; and (3) judgment for Plaintiffs in these

actions might have a collateral estoppel effect against the debtor, NextCard. At the hearing,

E&Y abandoned the latter two reasons and made clear that it is asserting “related to” jurisdiction

based upon E&Y’s potential equitable contribution claim against NextCard. In any event, the

Court concludes that these reasons would not suffice to establish “related to” jurisdiction. The

Court has not discovered any authority for the proposition that a state court action becomes

“related to” a bankruptcy simply because some discovery might be required of the debtor. 

Moreover, judgment for Plaintiffs in the instant actions against E&Y could not have a collateral

estoppel effect upon NextCard because NextCard is not a party to the instant actions. Subject

matter jurisdiction thus depends solely upon E&Y’s contention that it will assert an equitable

contribution claim against NextCard in the event E&Y is found liable to Plaintiffs in the instant

actions.

Whether E&Y’s potential future equitable contribution claim against NextCard creates a

sufficient nexus between the instant actions and the NextCard bankruptcy to create “related to”

jurisdiction presents a difficult question. In Fietz v. Great Western Savings, 852 F.2d 455 (9th

Cir. 1988), the Ninth Circuit adopted the test set forth by the Third Circuit in Pacor, Inc. v.

Higgins, 743 F.2d 984 (3d Cir. 1984), overruled on other grounds by Things Remembered, Inc.

v. Petrarca, 516 U.S. 124 (1995). In Pacor, John and Louise Higgins brought a state court action

against Pacor for damages arising from John Higgins’ exposure to asbestos supplied by Pacor. 

Pacor filed a third party complaint against Manville, the original manufacturer of the asbestos. 

Manville subsequently filed for bankruptcy and Pacor’s third party action against Manville was
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Case No. C-05-25-JF / C-05-26-JF

ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

severed from the main action. A dispute thereafter arose as to whether the Higgins-Pacor action

was “related to” the Manville bankruptcy such that the entire controversy could be removed to

bankruptcy court. The Third Circuit concluded that “related to” jurisdiction did not exist.

The Third Circuit noted that in enacting 28 U.S.C. § 1471(b), the statutory predecessor to

§ 1334(b), “Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so

that they might deal efficiently and expeditiously with all matters connected with the bankruptcy

estate.” Pacor, 743 F.2d at 994. However, the court noted that the reach of the statute was not

unlimited, and that for subject matter jurisdiction to exist there must be a practical nexus between

the civil action and the bankruptcy. Id. The court stated the test for determining whether such a

nexus exists as follows:

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. [citations

omitted]. 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.

Id. 

Applying this test to the facts of the case before it, the Third Circuit concluded that “at

best” the Higgins’ action against Pacor was “a mere precursor to the potential third party claim

for indemnification by Pacor against Manville.” Id. at 995. The court stated that the outcome of

the Higgins-Pacor action could not determine any rights, liabilities or course of action of the

bankruptcy debtor, Manville. Id. The court further stated that because Manville was not a party

to the Higgins-Pacor action, it could not be bound by res judicata or collateral estoppel. Id. The

court found that the bankruptcy estate therefore “could not be affected in any way until the PacorManville third party action is actually brought and tried.” Id. The court distinguished the case

before it from those cases in which a written indemnity agreement made liability of the debtor on

a subsequent claim for indemnity or contribution virtually certain, or “automatic.” Id.

In Fietz, the Ninth Circuit explicitly adopted the Pacor test, characterizing it as the

broadest articulation of “related to” jurisdiction among the circuits. Fietz, 852 F.2d at 457. The
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Case No. C-05-25-JF / C-05-26-JF

ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

Ninth Circuit rejected formulations adopted by other circuits under which jurisdiction would not

exist “where the civil action is ‘conceivably’ related to the bankruptcy estate, but that

relationship is remote.” Id. In embracing the formulation articulated by Pacor, the court stated

that “[w]e reject any limitation on this definition; to the extent that other circuits may limit

jurisdiction where the Pacor decision would not, we stand by Pacor.” Id.

The Bankruptcy Appellate Panel (“BAP”) has applied the Pacor test to find a lack of

“related to” jurisdiction on facts similar to those in the instant actions. In In re ACI-HDT Supply

Co., 205 B.R. 231 (9th Cir. BAP 1997), the plaintiff investors alleged that they were defrauded

of more than $60 million in a “Ponzi” scheme marketed by a corporation, its officers and other

corporate partners. After the corporation filed for bankruptcy, the plaintiffs sued a number of the

officers and corporate partners in state court. One of the defendants removed the action to the

bankruptcy court, asserting that it was a core bankruptcy proceeding or that it was at least

“related to” the bankruptcy. Although the theory underlying the assertion of “related to”

jurisdiction was not clearly articulated in the decision, the theory apparently was that the state

court defendants and debtor corporation were joint tortfeasors in the Ponzi scheme. The BAP

concluded that there was no “related to” jurisdiction because there was no evidence that the state

court action would have any effect upon the bankruptcy estate, the debtor was not named as a

party in the state court action, and the state court action did not usurp any claims that the

bankruptcy trustee would have. Id. at 237-38. The same is true with respect to the actions

currently before this Court. While E&Y and NextCard are alleged to be joint tortfeasors with

respect to the alleged fraud against Plaintiffs, the instant actions cannot have any direct effect on

the bankruptcy. In the words of the Pacor court, the instant actions are at most “precursors” to

eventual third-party claims that E&Y might assert against NextCard in the event E&Y is found

liable here.

If these were the only authorities on point, this Court would have little difficulty in

concluding that “related to” jurisdiction does not exist. However, E&Y points out that the Third

Circuit appears to have drawn back from certain limitations on “related to” jurisdiction

articulated in Pacor. In In re Marcus Hook Dev. Park, Inc., 943 F.2d 261 (3rd Cir. 1991), the
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Case No. C-05-25-JF / C-05-26-JF

ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

court held that “[a] key word in [the Pacor test] is ‘conceivable.’ Certainty, or even likelihood,

is not a requirement.” Id. at 264-65. This language undercuts the language in Pacor indicating

that there must be some certainty that a successful contribution or indemnification claim would

be brought against the debtor. 

E&Y also relies heavily upon a Sixth Circuit case, In re Dow Corning Corp., 86 F.3d 482

(6th Cir. 1996), in which the court expressly rejected an “automatic” liability requirement. Until

the early nineties, Dow Corning was the predominant producer of silicone gel breast implants

and also supplied raw materials to other manufacturers. Amidst lawsuits by thousands of implant

recipients against Dow Corning and others, Dow Corning filed for bankruptcy. A question arose

whether suits against the nondebtor suppliers and manufacturers were “related to” the Dow

Corning bankruptcy. The Sixth Circuit found that because the suits against the nondebtors

potentially could give rise to claims for contribution or indemnification against Dow Corning, the

suits against the nondebtors were “related to” the bankruptcy. Id. at 494. The court

distinguished the facts before it from those in the Pacor action, stating that “[w]e believe there is

a qualitative difference between the single suit involved in Pacor and the overwhelming number

of cases asserted against Dow Corning and the nondebtor defendants in this case. A single

possible claim for indemnification or contribution simply does not represent the same kind of

threat to a debtor’s reorganization plan as that posed by the thousands of potential

indemnification claims at issue here.” Id. However, this distinction is presented as an additional

reason for declining to apply the “automatic” liability rationale set forth in Pacor; Dow Corning

appears to squarely reject any requirement of certainty that the bankruptcy estate will be affected,

and to hold that the possibility of a future contribution or indemnification claim against the

debtor is sufficient to confer “related to” jurisdiction over a civil action between nondebtors.

Finally, E&Y cites a number of district court decisions holding that an action between

nondebtors is “related to” a bankruptcy if there is a potential that the action might at some point

result in contribution or indemnification claims against the bankruptcy debtor. See, e.g., Pacific

Life Ins. Co. v. J.P. Morgan Chase & Co., 2003 WL 22025158, at *1 (C.D. Cal. 2003) (finding

“related to” jurisdiction on the basis of written indemnification agreements between defendants
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Case No. C-05-25-JF / C-05-26-JF

ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

and debtor, but stating broadly that “[c]ontingent claims of contribution and indemnification such

as those raised by Defendants may be sufficient to invoke ‘related to’ jurisdiction, even if

Defendants are not guaranteed indemnification”) (emphasis added); In re Sizzler Restaurants

Int’l, Inc., 262 B.R. 811, 819 n.5 (C.D. Cal. 2001) (holding that “[t]his court declines to accept a

reading of Pacor which requires an unconditional indemnification agreement or otherwise

automatic liability on the part of the debtor in order to find the existence of related to

jurisdiction”).

The Court is left with the impression that the standard originally articulated in Pacor has

evolved in a manner suggesting that the Third Circuit, if it were confronted with the facts of

Pacor today, might conclude that “related to” jurisdiction existed after all. This impression is

troubling in light of the Ninth Circuit’s characterization of Pacor as the most expansive

articulation of “related to” jurisdiction and refusal to adopt more limited approaches of other

circuits, including the Sixth Circuit, which now has rejected Pacor’s “automatic” liability

language as inappropriately narrow. 

This Court thus is left with something of a dilemma. The Ninth Circuit clearly and

unambiguously adopted Pacor in Fietz. Applying Pacor to the facts before this Court, it would

be impossible to find the existence of “related to” jurisdiction. However, E&Y makes an

appealing argument that strict application of Pacor would be contrary to current trends and that if

confronted with the issue today the Ninth Circuit would adopt the broader test for “related to”

jurisdiction articulated in the recent cases discussed above. While E&Y may be correct as to

what the Ninth Circuit would do if confronted with the issue today, this Court is bound by what

the Ninth Circuit did when confronted with the issue in 1988, which was to adopt Pacor

explicitly and without reservation. Applying that case here, the Court is constrained to grant

Plaintiffs’ motions to remand.

2. Equitable Considerations For Remand 

Because the Court concludes that it lacks “related to” jurisdiction, it need not address

Plaintiffs’ alternative request that the Court exercise its discretion to remand the actions under 28

U.S.C. 1452. Were the Court to conclude that it has subject matter jurisdiction, it likely would
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 The earlier assignment of the securities fraud action and related cases to this Court was

the basis of the transfer of the instant cases to this Court as additional related cases.

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Case No. C-05-25-JF / C-05-26-JF

ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

not remand the actions on equitable grounds. In light of the Court’s familiarity with the

NextCard securities fraud action and a number of related actions,3 judicial efficiency and

economy would have argued strongly for keeping the case here. However, such considerations

cannot confer subject matter jurisdiction where none otherwise exists. 

III. ORDER

Plaintiffs’ motions for remand are GRANTED.

DATED: July 5, 2005

/s/ electronic signature authorized 

__________________________________

JEREMY FOGEL

United States District Judge
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Case No. C-05-25-JF / C-05-26-JF

ORDER GRANTING PLAINTIFFS’ MOTIONS TO REMAND

(JFLC2)

This Order was served on the following persons:

Lawrence Ball attorneys@highman-ball.com, 

Thomas David Blanford tdb@rjop.com, rjf@rjop.com 

Elissa Jill Germaine , Esq elissa.germaine@LW.com, Linda.tam@lw.com 

Bruce J. Highman attorneys@highman-ball.com 

James K. Lynch jim.lynch@lw.com, 

Timothy L. O'Mara tim.omara@lw.com, 

Edward W. Swanson eswanson@swansonmcnamara.com 

Peter Alan Wald peter.wald@lw.com,