Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_04-cv-06659/USCOURTS-caed-1_04-cv-06659-1/pdf.json

Parties Involved:
Mazda American Credit
Counter Claimant
Cobrain Sparrow
Counter Defendant

Document Text:

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

COBRAIN SPARROW

Plaintiff,

v.

MAZDA AMERICAN CREDIT,

Defendant.

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1:04-cv-06659 OWW SMS

MEMORANDUM DECISION AND

ORDER GRANTING PLAINTIFF’S

MOTION TO DISMISS

DEFENDANT’S COUNTERCLAIMS

PURSUANT TO FED. R. CIV. P.

12(b)(1)

I. INTRODUCTION

Plaintiff COBRAIN SPARROW (“Plaintiff”) moves to dismiss the

counterclaim of Defendant MAZDA AMERICAN CREDIT (“Defendant”). 

(Doc. 19, Pl.’s Mem.) Defendant opposes the motion. (Doc. 20,

Def.’s Opp.)

II. BACKGROUND

This case arises out of Plaintiff’s allegation that

Defendant violated state and federal law by engaging in abusive

practices in its attempts to collect a debt from Plaintiff. Cal.

Civ. Code §§ 1788 et seq. (Rosenthal Fair Debt Collection

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Practices Act (“RFDCPA”)); 15 U.S.C. §§ 1692, et seq. (Fair Debt

Collection Practices Act (“FDCPA”)).

Plaintiff filed the original complaint in the Superior Court

of the State of California, County of Fresno, in October 2004. 

(Doc. 1, Notice of Removal at Ex. A, Complaint) Defendant

answered Plaintiff’s complaint (Doc. 6), and also filed three

state law counterclaims (Doc. 7) against Plaintiff to collect the

alleged underlying debt: (1) Breach of Contract; (2) Money Had &

Received; and (3) Claim and Delivery. 

Plaintiff now moves to dismiss Defendant’s counterclaims for

lack of subject matter jurisdiction pursuant to Federal Rule of 

Civil Procedure 12(b)(1). (Doc. 19, Pl.’s Mem., filed June 25,

2005) Plaintiff argues that Defendant’s counterclaims are not

compulsory and that therefore, this court does not have

supplemental jurisdiction over them. Defendant filed opposition

to Plaintiff’s motion, arguing that its counterclaims are

compulsory and that supplemental jurisdiction exists. (Doc. 20,

Def.’s Mem., filed July 22, 2005) Plaintiff replied. (Doc. 21,

Pl.’s Reply, filed July 29, 2005) On August 5, 2005, the parties

stipulated to submit these issues on the papers and waive oral

argument. (Doc. 23)

III. LEGAL STANDARD

“It is a fundamental precept that federal courts are courts

of limited jurisdiction.” Owen Equipment & Erection Co. v.

Kroger, 437 U.S. 365, 374 (1978). Federal courts have original

jurisdiction over all civil actions “arising under the

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Constitution, laws, or treatises of the United States” and in all

civil actions where complete diversity of citizenship exists and

the amount in controversy exceeds $75,000. 28 U.S.C. §§ 1331,

1332. Here, while original jurisdiction exists over Plaintiff’s

claims under the FDCPA, which was created by federal law,

original jurisdiction does not exist over Defendant’s state-law

counterclaims. Diversity jurisdiction cannot provide an

independent jurisdictional basis for Defendant’s counterclaims

because the amount Defendant is claiming is not over $75,000, as

28 U.S.C. § 1332 requires. The only basis for jurisdiction over

Defendant’s counterclaims is the supplemental jurisdiction

statute, 28 U.S.C. § 1367.

Plaintiff moves to dismiss Defendant’s state law

counterclaims for lack of subject matter jurisdiction on the

basis that supplemental jurisdiction over those claims is

improper. Plaintiff moves under Rule 12(b)(1) of the Federal

Rule of Civil Procedure, which allows a party to move to dismiss

a claim or counterclaim for lack of subject matter jurisdiction. 

Once a party challenges subject matter jurisdiction, the nonmoving party bears the burden to establish that subject matter

jurisdiction exists. Kokkonen v. Guardian Life Ins. Co., 511

U.S. 375, 378 (1978). 

The supplemental jurisdiction statute, 28 U.S.C. § 1367,

grants federal courts supplemental jurisdiction over claims over

which no original jurisdiction exists. Section 1367(a) grants

supplemental jurisdiction over state law counterclaims “that are

so related to claims in the action within such original

jurisdiction that they form part of the same case or controversy

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under Article III of the United States Constitution.” Section

1367 applies to state law claims brought by a plaintiff as well

as to counterclaims brought by a defendant. 

Rule 13 of the Federal Rules of Civil Procedure defines two

types of counterclaims: compulsory and permissive. “Compulsory”

counterclaims are claims that “arise[] out of the transaction or

occurrence that is the subject matter of the opposing party’s

claim.” Fed. R. Civ. P. 13(a). The Ninth Circuit applies a

“logical relationship test” to determine whether a counterclaim

is compulsory. Under this test, the court “analyze[s] whether

the essential facts of the various claims are so logically

connected that considerations of judicial economy and fairness

dictate that all the issues be resolved in one lawsuit.” Pochiro

v. Prudential Ins. Co. of Amer., 827 F.2d 1246, 1249 (9th Cir.

1987) (quoting Harris v. Steinem, 571 F.2d 119, 123 (2d Cir.

1978). If a defendant fails to bring a compulsory counterclaim,

he is barred from asserting that claim in a future proceeding. 

Fed. R. Civ. P. 13(a); Sams v. Beech Aircraft, 625 F.2d 273, 276

n. 4 (9th Cir. 1980) (citing Baker v. Gold Seal Liquors, 417 U.S.

467, 469 n. 1 (1974); see also Channell v. Citicorp Nat’l

Services, Inc., 89 F.3d 379, 385 (7th Cir. 1996). The

traditional rule is that federal courts have supplemental

jurisdiction over compulsory counterclaims, since a plaintiff

would otherwise lose his opportunity to be heard on that claim. 

See also Gold Seal Liquors, 417 U.S. at 468 n. 1; Channell, 89

F.3d at 385 (“Refusal to entertain a compulsory counterclaim

might lead to its forfeiture.”).

All counterclaims that are not compulsory are “permissive.” 

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Permissive counterclaims are claims that do “not aris[e] out of

the transaction or occurrence that is the subject matter of the

opposing party’s claim.” Fed. R. Civ. P. 13(b). Before 1990,

when Congress enacted the supplemental jurisdiction statute, the

rule was clear that federal courts did not have jurisdiction over

permissive counterclaims absent an independent basis for federal

subject matter jurisdiction. See Channell, 89 F.3d at 384; Adams

St. Joint Venture v. Harte, 231 F. Supp. 2d 759, 761-62 (N.D.

Ill. 2002); Jones v. Ford Motor Credit Co., 358 F.3d 205, 212-13

(2d Cir. 2004); see also Michelle S. Simon, Defining the Limits

of Supplemental Jurisdiction Under 28 U.S.C. § 1367: A Hearty

Welcome to Permissive Counterclaims, 9 Lewis & Clark L. Rev. 295

(Summer 2005).

After Congress enacted 28 U.S.C. § 1367, however, at least

two circuits (the Seventh and the Second) have held that a

federal court may exercise supplemental jurisdiction over certain

permissive counterclaims. Channell, 89 F.3d at 384; Rothman v.

Emory Univ, 123 F.3d 446, 454 (7th Cir. 1997); Jones, 358 F.3d at

212-13. These courts have altogether abandoned the analysis for

determining whether supplemental jurisdiction exists based on

whether a counterclaim is compulsory or permissive. See e.g.,

Adams St. Joint Venture, 231 F. Supp. 2d at 761-62; Jones, 358

F.3d at 212-13. These courts reason that the issue whether

supplemental jurisdiction exists over counterclaims is determined

by the language of § 1367 alone. See Channel, 89 F.3d at 386. 

In other words, whether supplemental jurisdiction exists over a

counterclaim depends on whether the state counterclaim and the

federal claim “so related...that they form part of the same case

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or controversy under Article III of the United States

Constitution.”

The language of § 1367 derives from the test for

supplemental jurisdiction as stated in Mine Workers v. Gibbs, 383

U.S. 715, 725 (1966), in which the Supreme Court held that

federal courts have supplemental jurisdiction over a state law

claim where the state claim and the federal claim “derive from a

common nucleus of operative fact,” such that “the relationship

between [the federal] claim and the state claim permits the

conclusion that the entire action before the court comprises but

one constitutional ‘case.’” See also City of Chicago v. Int’l

College of Surgeons, 522 U.S. 156, 164-65 (1997).

By definition, compulsory counterclaims “form part of the

same [Article III] case or controversy as the federal claims

since compulsory counterclaims “arise out of the same transaction

or occurrence” as the primary claims. The § 1367 test for

supplemental jurisdiction is broader than the test for compulsory

counterclaims, so counterclaims that are compulsory under the

“same transaction or occurrence” test automatically pass the

§ 1637 “same Article III case or controversy” test.

The difficulty with the traditional rule arises when the

§ 1637 supplemental jurisdiction analysis is applied to

permissive counterclaims. The § 1637 same case or controversy

test is clearly broader than the “same transaction or occurrence”

test for compulsory counterclaims, but the § 1637 test also

appears to be broader than the test for permissive counterclaims. 

The test for permissive counterclaims is that the state law claim

does not arise out of the same transaction or occurrence as the

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1 The Ninth Circuit did cite the Seventh Circuit’s Channel

decision with approval in CE Distrib., LLC v. New Sensor Corp.,

380 F.3d 1107, 1114 (9th Cir. 2004). The issue in CE Distrib.,

however, involved a question of pendent personal jurisdiction,

and did not address supplemental subject matter jurisdiction.

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federal claim. However, just because a state law claim does not

arise out of the same transaction or occurrence as the federal

law claim does not mean that the state law claim does not arise

out of facts that bear some relationship to the facts from which

the federal claim arises so that the state claim and the federal

claim are considered part of the same constitutional “case.” 

Ammerman v. Sween, 54 F.3d 423, 424 (7th Cir. 1995) (holding that

§ 1367 requires a “loose factual connection between the claims”);

Baer v. First Options of Chicago, Inc., 72 F.3d 1294, 1298-1301

(7th Cir. 1995); Channel, 89 F.3d at 385; see also Jones, 358

F.3d at 213-14.

The Ninth Circuit does not appear to have explicitly

addressed the issue whether the compulsory/permissive

counterclaim analysis should be abandoned altogether.1

III. ANALYSIS

Whether supplemental jurisdiction can be exercised over

Defendant’s counterclaims under § 1637 is a question of law. In

this case, if Defendant’s counterclaims are compulsory,

supplemental jurisdiction exists and the inquiry ends. If,

however, Defendant’s counterclaims are permissive, the question

is whether supplemental jurisdiction exists over those claims

under § 1367(a). If yes, the next question is whether the court

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should exercise its discretion to decline to assert supplemental

jurisdiction over those claims.

A. Whether Defendant’s Counterclaims are Compulsory.

The first question is whether Defendant’s counterclaims for

the debt underlying Plaintiff’s unfair collection practices

claims are compulsory. Several courts have considered the

question whether a claim for the underlying debt in an action

originally brought by the plaintiff under the FDCPA is a

compulsory counterclaim under Rule 13(a). Plaintiff cites two

published cases holding that counterclaims for the underlying

debt are not compulsory. Leatherwood v. Universal Bus. Serv.

Co., 115 F.R.D. 48 (W.D.N.Y. 1987); Hart v. Clayton-Parker and

Assoc., Inc., 869 F. Supp. 774 (D. Ariz. 1994). Another district

court in the Ninth Circuit has held the same. Taylor v. Bryant,

Inc., 275 F. Supp. 2d 1305 (D. Nev. 2003). These courts reason

that breach of contract counterclaims for the underlying debt are

not “logically connected” to the unfair-collection-practices

claim, despite that they both relate to the same debt. While the

debt does provide some factual connection between the claims,

because they arise out of the debt, the legal issues and evidence

relating to the claims are considered sufficiently distinct so as

not to meet the “logical relationship” test.

This reasoning may, on the surface, seem contrary to the

“logical relationship” test for compulsory counterclaims. 

Nevertheless, this reasoning has its source in three overlapping

inquiries and policy concerns identified in Leatherwood. First,

the Leatherwood court noted that the issues raised by the FDCPA

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claim and the counterclaim for the debt are distinct:

The [FDCPA claim] relates to the application

of the FDCPA and focuses on a narrow realm of

facts concerning the use of abusive,

deceptive and/or unfair debt collection

practices by the defendants. On the other

hand, [the defendant’s] counterclaim

encompasses a private duty under state law

and requires a broad proof of facts

establishing the existence and performance of

a contract, the validity of the contract’s

provisions, a breach of the contract by the

plaintiff and monetary damages resulting from

the breach. The claim and counterclaim are,

of course, “offshoots” of the same basic

transaction, but they do not represent the

same basic controversy between the parties.

115 F.R.D. at 49.

Second, the court noted that the evidence needed to support

each claim differs. The plaintiff needs to produce evidence of

the allegedly abusive collection practices, including evidence

regarding the specific actions of the defendant, such as phone

calls and letters, on certain dates and times; whereas the

defendant needs to produce evidence of the existence of a valid

contract and breach. Id. at 49-50. 

Third, the Leatherwood court noted that the claims are not

related on a “transactional” level: 

[T]he FDCPA claim involves the enforcement of

federal policy and federal statutory law

concerning a debt collector’s conduct in

collecting a debt. This claim does not

concern any obligations created by the

underlying debt. In contrast, the

counterclaim alleges that the plaintiff has

defaulted on a private contract governed by

state law.

Id. at 50. Two district courts in the Ninth Circuit (District of

Arizona and District of Nevada) cited Leatherwood with approval

and have applied similar reasoning in almost identical fact

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2 Plaintiff cites a case decided by the Eastern District of

Californa, Ballard v. Equifax Check Serv., Inc., 186 F.R.D. 589,

599 (E.D. Cal. 1999), to support her argument that Defendant’s

counterclaims are not compulsory. Ballard was a class action

where the plaintiffs claimed violation of the FDCPA and the

RFDCPA. The defendants counterclaimed for the underlying debt. 

Ballard does not support Plaintiff’s argument that the

counterclaims for the underlying debt are not compulsory. The

court declined to exercise jurisdiction based on its

discretionary authority to decline supplemental jurisdiction

under §1637(c)(4), not based on a finding that a claim for the

underlying debt in a FDCPA action is not compulsory. 

Furthermore, the Ballard decision related to a motion for

reconsideration of an initial district court decision. The

reviewing court did not disturb the initial court’s holding that

the counterclaim was compulsory.

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situations.2 Hart, 869 F. Supp. at 776 (holding that to

determine whether claim is compulsory, “courts should consider

whether the facts necessary to prove the claim and counterclaim

substantially overlap”); Taylor, 275 F. Supp. 2d at 1307 (same).

Defendant argues that its counterclaims are compulsory under

the Ninth Circuit’s “logical relationship” test. However,

Defendant cites no published cases holding that a claim for the

underlying debt in a FDCPA action was held to be compulsory. The

facts in this case are almost identical to the facts in three

other district court cases holding that a counterclaim for the

underlying debt in an unfair debt collection action is not

compulsory. Leatherwood, 115 F.R.D. at 49; Hart, 869 F. Supp. at

777-78; Taylor, 275 F. Supp. 2d at 1307. Defendant provides no

argument as to the relationship and/or overlap between the

evidence about the counterclaims to collect the debt (including

evidence “regarding the origination of [Plaintiff’s] debt and

payments that she made to reduce the debt”) and evidence of

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3 Defendant’s argument that its counterclaims are compulsory

because they are related to its affirmative defense of off-set is

not persuasive. Defendant cites a district court case to support

its argument that its counterclaims should proceed because they

are based on similar evidence and issues to be addressed on its

off-set affirmative defense. Competitive Technologies v. Fujitsu

Ltd., 286 F. Supp. 2d 1118, 1139 (N.D. Cal. 2003). Competitive

Technologies cites no Ninth Circuit authority supporting this

principle and has not been cited by any other courts in support

of this principle. Furthermore, the facts in Competitive

Technologies, which involved patent infringement issues and which

were highly involved and complex, are not analogous to the facts

at issue here.

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Defendant’s allegedly abusive actions in collecting the debt. 

(Doc. 20, Def.’s Opp. 5) Whether a plaintiff in an unfair debt

collection practices action actually has outstanding debt is

irrelevant to the merits of that claim. Baker v. G.C. Services

Corp., 677 F.2d 775, 777 (9th Cir. 1982); McCartney v. First City

Bank, 970 F.2d 45, 47 (5th Cir. 1992); Keele v. Wexler, 149 F.3d

589, 594 (7th Cir. 1998). Defendant’s claims are not compulsory

and supplemental jurisdiction does not exist on that basis.3

B. Whether Supplemental Jurisdiction Exists over

Defendant’s Counterclaims.

The analysis of the district courts in Hart and Taylor

determined that the claim for the underlying debt was a

permissive counterclaim and that supplemental jurisdiction

therefore did not exist. Despite that each case was decided

after 1990 (when § 1637 took effect), each court held that

supplemental jurisdiction could not be exercised on the basis

that the claims were permissive. The court in Hart did not

discuss § 1367. Hart, 869 F. Supp. at 777. The Taylor court did

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4 Arguably, it was not necessary to engage in the analysis

regarding the issue whether Defendant’s counterclaims are

compulsory. The court nevertheless did so because, aside from

being instructive, the Rule 13 analysis addresses the parties’

arguments, which were structured around Rule 13 and not around

§ 1637. In addition, the Ninth Circuit has not held that the

compulsory/permissive analysis is incorrect.

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discuss § 1367, and cited to authority holding that § 1367

maintained the compulsory/permissive distinction:

Defendant maintains that under section

1367(a), the court may exercise jurisdiction

over the counterclaim regardless of whether

federal subject matter jurisdictional

requirements are independently met. 

Defendant’s argument, however, overlooks the

fact that even under section 1367(a), courts

must still distinguish between compulsory and

permissive counterclaims: federal courts have

supplemental jurisdiction over compulsory

counterclaims, but permissive counterclaims

require their own jurisdictional basis. 

Unique Concepts, Inc. v. Manuel, 930 F.2d

573, 574 (7th Cir. 1991); Shamblin v. City of

Colchester, 793 F. Supp. 831, 833 (C.D. Ill.

1992).

Taylor, 275 F. Supp. 2d at 1307. Taylor was decided in 1994,

before the Seventh and Second Circuits addressed this issue and

held the opposite, in 1996 and 2004, respectively. Channell, 89

F.3d 379; Jones, 358 F.3d 205.

Based upon the language of § 1637 and the holdings of the

Seventh and Second Circuits in Channel and Jones, the analysis no

longer ends with the compulsive/permissive counterclaim

distinction.4 Because Defendant’s counterclaims are not

compulsory, the next question is whether supplemental

jurisdiction over the counterclaims nevertheless exists under 28

U.S.C. § 1367(a). The inquiry, referred to as the “case or

controversy” test, as discussed above, is whether the

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counterclaim is “so related to claims in the action within such

original jurisdiction that they form part of the same case or

controversy under Article III of the United States Constitution.” 

Because Defendant’s counterclaims bear a logical and factual

relationship to Plaintiff’s claims in that they are related to a

single debt incurred by Plaintiff, supplemental jurisdiction

exists over Defendant’s counterclaims under § 1367(a).

The next question is whether the court should nevertheless

decline to exercise jurisdiction under § 1367(c), which provides

that a district court may decline to exercise supplemental

jurisdiction in one of four situations:

The district courts may decline to exercise

supplemental jurisdiction over a claim under

subsection (a) if--

(1) the claim raises a novel or complex

issue of State law,

(2) the claim substantially predominates

over the claim or claims over which the

district court has original

jurisdiction,

(3) the district court has dismissed all

claims over which it has original

jurisdiction, or

(4) in exceptional circumstances, there are

other compelling reasons for declining

jurisdiction.

The applicable subsection here is § 1367(c)(4). Even if

supplemental jurisdiction exists over Defendant’s counterclaims,

a court may decline to exercise that jurisdiction where

compelling reasons exist. In a case such as this one, strong

policy reasons favor declining to exercise jurisdiction. As the

court states in Leatherwood, allowing a debt collector to bring

an action for the underlying debt in a case brought under the

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FDCPA may deter litigants from pursuing their rights under that

statute:

To allow a debt collector defendant to seek

to collect the debt in the federal action to

enforce the FDCPA might well have a chilling

effect on persons who otherwise might and

should bring suits such as this. Moreover,

it would involve this Court in questions of

no federal significance. Given the remedial

nature of the FDCPA “and the broad public

policy which it serves, federal courts should

be loath to become immersed in the debt

collection suits of...the target of the very

legislation under which” a FDCPA plaintiff

states a cause of action.

115 F.R.D. at 50 (quoting Roberts v. Nat’l Sch. of Radio &

Television Broadcasting, 374 F. Supp. 1266, 1271 (N.D. Ga.

1974)). A major purpose of the FDCPA is to protect individuals

from unfair debt collection practices regardless of whether the

individual actually owes a debt. Baker, 677 F.2d at 777 (“The

[FDCPA] is designed to protect consumers who have been victimized

by unscrupulous debt collectors, regardless of whether a valid

debt actually exists.”); McCartney, 970 F.2d at 47 (“The Act

makes debt collectors liable for various ‘abusive, deceptive, and

unfair debt collection practices’ regardless of whether the debt

is valid.”); Keele, 149 F.3d at 594 (“[T]he plaintiff who

admittedly owes a legitimate debt has standing to sue if the

[FDCPA] is violated by an unprincipled debt collector.”).

Strong policy reasons exist to prevent the chilling effect

of trying FDCPA claims in the same case as state law claims for

collection of the underlying debt. This policy satisfies the

exceptional circumstances requirement to support an order

declining to exercise supplemental jurisdiction over Defendant’s

state law claims to enforce the debt.

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V. CONCLUSION

For all the foregoing reasons, Plaintiff’s motion to

dismiss Defendant’s counterclaims is GRANTED. 

Defendant’s counterclaims are DISMISSED WITHOUT

PREJUDICE.

SO ORDERED. 

DATED: August 26, 2005. 

/S/OLIVER W. WANGER

 Oliver W. Wanger

UNITED STATES DISTRICT JUDGE

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