598 F.2d 1357 (5th Cir. 1979), 77-2034, Plant v. Blazer Financial Services, Inc. of Georgia
|Citation:||598 F.2d 1357|
|Party Name:||Theresa PLANT, Plaintiff-Appellant, v. BLAZER FINANCIAL SERVICES, INC. OF GEORGIA, Defendant-Appellee.|
|Case Date:||July 23, 1979|
|Court:||United States Courts of Appeals, Court of Appeals for the Fifth Circuit|
Ralph Goldberg, Graydon W. Florence, Jr., Atlanta, Ga., for plaintiff-appellant.
Arthur Gregory, Atlanta, Ga., for defendant-appellee.
Appeal from the United States District Court for the Northern District of Georgia.
Before MORGAN, RONEY and VANCE, Circuit Judges.
RONEY, Circuit Judge:
In this truth-in-lending case, we resolve two important issues to this field of the law. First, we decide that an action on the underlying debt in default is a compulsory counterclaim that must be asserted in a suit by the debtor on a truth-in-lending cause of action. Second, we hold that a successful plaintiff in a truth-in-lending suit is entitled to have her attorneys paid from the award for attorney's fees and not have those fees setoff against a counterclaim judgment on the debt in favor of the defendant against the plaintiff creditor.
Although plaintiff prevailed on her truth-in-lending claim in this case, both her award and the attorney's fees allowed were setoff against the lender defendant's counterclaim on the underlying debt. In an appeal involving issues similar to those raised in the companion cases of Carr v. Blazer Financial Services, Inc., 598 F.2d 1368 (5th Cir. 1979) and Williams v. Blazer Financial Services, Inc., 598 F.2d 1371 (5th Cir. 1979), also decided today, plaintiff attacks the jurisdiction of the court to entertain the counterclaim, the rejection of defenses to the counterclaim based upon Georgia law, and the offset of attorney's fees against the counterclaim judgment. While upholding the judgment of the district court on the state law questions and agreeing that a counterclaim on the debt evidenced by the note which is the subject of a truth-in-lending action is compulsory, we reverse the offset of attorney's fees, holding that an award of attorney's fees under this Act is not subject to setoff against the debtor's outstanding debts to the creditor.
On July 17, 1975 plaintiff Theresa Plant executed a note in favor of defendant Blazer Financial Services, Inc. for $2,520.00 to be paid in monthly installments of $105.00. No payments were made on the note. In March 1976 plaintiff commenced a civil action under § 1640 of the Truth-in-Lending Act, 15 U.S.C.A. § 1601 Et seq., for failure to make disclosures required by the Act and by Regulation Z, 12 C.F.R. § 226.1 et seq. (1978), promulgated thereunder. 1 Defendant counterclaimed on the note for the unpaid balance. Based on defendant's failure to disclose a limitation on an after-acquired security interest, the trial court held the disclosure inadequate and awarded plaintiff the statutory penalty of $944.76 and $700.00 in attorney's fees. Although in the instant case defendant does not appeal the adverse judgment on the truth-in-lending violation, a similar judgment favorable to a plaintiff borrower on the same kind of violation is affirmed in the companion case of Carr v. Blazer Financial Services, Inc., supra.
The trial court, however, offset the plaintiff's award and the attorney's fee award against the judgment for defendant on the counterclaim. From this judgment and setoff, plaintiff appeals on three issues: (1) the jurisdiction of the court to entertain the counterclaim, (2) defenses to the counterclaim under Georgia law, and (3) the offset of attorney's fees.
Plaintiff challenges the trial court's ruling that defendant's counterclaim on the underlying debt was compulsory. 2 The issue is jurisdictional. A permissive counterclaim must have an independent jurisdictional basis, Diamond v. Terminal Ry. Alabama State Docks, 421 F.2d 228 (5th Cir. 1970), while it is generally accepted that a compulsory counterclaim falls within the ancillary jurisdiction of the federal courts even if it would ordinarily be a matter for state court consideration. Baker v. Gold Seal Liquors, Inc., 417 U.S. 467, 469 n. 1, 94 S.Ct. 2504, 41 L.Ed.2d 243 (1974); Revere Copper & Brass, Inc. v. Aetna Casualty & Surety Co., 426 F.2d 709 (5th Cir. 1970). In the instant case there is no independent
basis since neither federal question nor diversity jurisdiction is available for the counterclaim. Consequently, if the counterclaim were to be treated as permissive, defendant's action on the underlying debt would have to be pursued in the state court. 3
The issue of whether a state debt counterclaim in a truth-in-lending action is compulsory or permissive is one of first impression in this Circuit, has never, to our knowledge, been decided by a court of appeals, and has received diverse treatment from a great number of district courts.
Two cases decided by different panels of this Court contain dicta which address this issue but are not controlling. The cases were related and arose in a procedural setting opposite from this action, that is, a truth-in-lending counterclaim was asserted in an action on the debt.
In the first decision, Spartan Grain & Mill Co. v. Ayers, 517 F.2d 214, 220 (5th Cir. 1975), the Court determined the trial court should have allowed defendants to amend pleadings under Rule 13(f), Fed.R.Civ.P., which, because of their compulsory nature, could be met with a plea of res judicata in a later suit. 4 See Aycock v. Household Finance Corp. of Ga., 142 Ga.App. 207, 235 S.E.2d 578 (1977). It has been suggested that this dictum is ambiguous, however, because while the court speaks of counterclaim in the singular, there were actually two counterclaims in the case and the other, based on Georgia usury statutes, was clearly compulsory. Meadows v. Charlie Wood, Inc., 448 F.Supp. 717, 722 (M.D.Ga.1978).
In the second case, Spartan Grain & Mill Co. v. Ayers, 581 F.2d 419 (5th Cir. 1978), the district court had held that the truth-in-lending counterclaim was barred by the one-year statute of limitations. 15 U.S.C.A. § 1640(e). The debtor argued on appeal that the statute of limitations was tolled by the filing of the original complaint on the underlying debt because the counterclaim was compulsory. 581 F.2d at 429-430. The Court observed that the district court had applied the one-year limitations period from the time the contract was made to bar the counterclaim but noted that even if the year was measured from the last sale under the contract within which time the complaint was filed, the counterclaim was better considered permissive. 581 F.2d at 430.
Rule 13(a), Fed.R.Civ.P., provides that a counterclaim is compulsory if it "arises out of the transaction or occurrence" that is the subject matter of plaintiff's claim. 5 Four tests have been suggested to further define when a claim and counterclaim arise from the same transaction:
1) Are the issues of fact and law raised by the claim and counterclaim largely the same?
2) Would res judicata bar a subsequent suit on defendant's claim absent the compulsory counterclaim rule?
3) Will substantially the same evidence support or refute plaintiff's claim as well as defendant's counterclaim?
4) Is there any logical relation between the claim and the counterclaim?
6 Wright & Miller, Federal Practice and Procedure § 1410 at 42 (1971). An affirmative
answer to any of the four questions indicates the counterclaim is compulsory. Id. at 43.
The test which has commended itself to most courts, including our own, is the logical relation test. Revere Copper & Brass, Inc. v. Aetna Casualty & Surety Co., 426 F.2d at 714; 6 Wright & Miller at 48. The logical relation test is a loose standard which permits "a broad realistic interpretation in the interest of avoiding a multiplicity of suits." 3 Moore's Federal Practice P 13.13 at 300. "The hallmark of this approach is its flexibility." 6 Wright & Miller at 46-47.
In Revere Copper & Brass this Court added a third tier to the counterclaim analysis by further defining "logical relationship" to exist when the counterclaim arises from the same "aggregate of operative facts" in that the same operative facts serves as the basis of both claims or the aggregate core of facts upon which the claim rests activates additional legal rights, otherwise dormant, in the defendant. 426 F.2d at 715.
Applying the logical relationship test literally to the counterclaim in this case clearly suggests its compulsory character because a single aggregate of operative facts, the loan transaction, gave rise to both plaintiff's and defendant's claim. Because a tallying of the results from the district courts which have decided this question, however, shows that a greater number have found such a counterclaim merely permissive, we subject the relationship between the claims to further analysis.
The split of opinion on the nature of debt counterclaims in truth-in-lending actions appears to be, in large part, the product of competing policy considerations between the objectives of Rule 13(a) and the policies of the Truth-in-Lending Act, and disagreement over the extent to which federal courts should be involved in state causes of action for debt. While Rule 13(a) is intended to avoid multiple litigation by consolidating all controversies between the parties, several courts and commentators have observed that accepting creditors' debt counterclaims may obstruct achievement of the goals of the Truth-in-Lending Act. 6
Various arguments are made compositely as follows: The purpose of the Act is
to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.
15 U.S.C.A. § 1601. This purpose is effectuated by debtors' standing in the role of private attorneys general not merely to redress individual injuries but to enforce federal policy. The success of this private...
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