Jones v. Ford Motor Credit Co.

• Decision Date: 05 February 2004
• Docket Number: No. 03-7398.,03-7398.
• Citation: 358 F.3d 205
• Parties: Joyce JONES, Martha L. Edwards, Lou Cooper and Vincent E. Jackson, individually and as class representatives, Plaintiffs-Appellees, v. FORD MOTOR CREDIT COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

358 F.3d 205

Joyce JONES, Martha L. Edwards, Lou Cooper and Vincent E. Jackson, individually and as class representatives, Plaintiffs-Appellees, v. FORD MOTOR CREDIT COMPANY, Defendant-Appellant.

No. 03-7398.

United States Court of Appeals, Second Circuit.

Argued: October 10, 2003.

Decided: February 5, 2004.

COPYRIGHT MATERIAL OMITTED

Daniel H. Schlueter, Atlanta, Ga. (Thomas M. Byrne, Valerie S. Sanders, Sutherland Asbill & Brennan LLP, Atlanta, Ga.; John H. Beisner, Neil K. Gilman, Rachel A. Shapiro, O'Melveny & Myers LLP, Washington, D.C., on the brief), for Defendant-Appellant.

Darnley D. Stewart, New York, N.Y. (Daniel L. Berger, Bernstein Litowitz Berger & Grossman LLP, New York, N.Y.; Michael E. Terry, Terry & Gore, Nashville, Tenn.; Gary Klein, Grant & Roddy, Boston, Mass.; Kevin Greco, Sandak Friedman Hennessey & Greco, LLP, Stamford, Conn.; Wyman O. Gilmore, Grove Hill, Ala.; Clint W. Watkins, Brentwood, Tenn.; Stuart Rossman, National Consumer Law Center, Boston, Mass., on the brief), for Plaintiffs-Appellees.

Before: NEWMAN, SOTOMAYOR, and WESLEY, Circuit Judges.

JON O. NEWMAN, Circuit Judge.

This appeal concerns the availability of subject matter jurisdiction for permissive counterclaims. It also demonstrates the normal utility of early decision of a motion for class certification. Defendant-Appellant Ford Motor Credit Company ("Ford Credit") appeals from the June 14, 2002, judgment of the United States District Court for the Southern District of New York (Lawrence M. McKenna, District Judge) dismissing for lack of jurisdiction its permissive counterclaims against three of the four Plaintiffs-Appellees and its conditional counterclaims against members of the putative class that the Plaintiffs-Appellees seek to certify. Jones v. Ford Motor Credit Co., No. 00-CV-8330, 2002 WL 1334812 (S.D.N.Y. June 17, 2002). We conclude that supplemental jurisdiction authorized by 28 U.S.C. § 1367 may be available for the permissive counterclaims, but that the District Court's discretion under subsection 1367(c) should not be exercised in this case until a ruling on the Plaintiffs' motion for class certification. We therefore vacate and remand.

Background

Plaintiffs-Appellees Joyce Jones, Martha L. Edwards, Lou Cooper, and Vincent E. Jackson ("Plaintiffs"), individually and as class representatives, sued Ford Credit alleging racial discrimination under the Equal Credit Opportunity Act ("ECOA"), 15 U.S.C. § 1691 et seq. (2003). They had purchased Ford vehicles under Ford Credit's financing plan. They alleged that the financing plan discriminated against African-Americans. Although the financing rate was primarily based on objective criteria, Ford Credit permitted its dealers to mark up the rate, using subjective criteria to assess non-risk charges. The Plaintiffs alleged that the mark-up policy penalized African-American customers with higher rates than those imposed on similarly situated Caucasian customers.

In its Answer, Ford Credit denied the charges of racial discrimination and also asserted state-law counterclaims against Jones, Edwards, and Cooper for the amounts of their unpaid car loans. Ford Credit alleged that Jones was in default on her obligations under her contract for the purchase of a 1995 Ford Windstar, and that Edwards and Cooper were in default on payments for their joint purchase of a 1995 Mercury Cougar. Additionally, in the event that a class was certified, Ford Credit asserted conditional counterclaims against any member of that class who was in default on a car loan from Ford Credit. The Plaintiffs moved to dismiss Ford Credit's counterclaims for lack of subject matter jurisdiction, Fed.R.Civ.P. 12(b)(1), lack of personal jurisdiction, Fed.R.Civ.P. 12(b)(2), improper venue, Fed.R.Civ.P. 12(b)(3), and failure to state a claim upon which relief could be granted, Fed.R.Civ.P. 12(b)(6).

The District Court granted the Plaintiffs' motion and dismissed Ford Credit's counterclaims, summarizing its reasons for doing so as follows: "[D]efendant's counterclaims do not meet the standard for compulsory counterclaims[, and] ... pursuant to § 1367(c)(4), ... there are compelling reasons to decline to exercise jurisdiction over the counterclaims." Jones, 2002 WL 1334812, at *3.

In reaching these conclusions, Judge McKenna acknowledged some uncertainty. After determining that the counterclaims were permissive, he expressed doubt as to the jurisdictional consequence of that determination. On the one hand, he believed, as the Plaintiffs maintain, that permissive counterclaims must be dismissed if they lack an independent basis of federal jurisdiction. On the other hand, he acknowledged, citing Solow v. Jenkins, No. 98-CV-8726, 2000 WL 489667, at *2 (S.D.N.Y. Apr.25, 2000), that "there [was] some authority to suggest that ... the court should determine, based on the particular circumstances of the case, whether it ha[d] authority to exercise supplemental jurisdiction under § 1367(a)" over a counterclaim, regardless of whether it was compulsory or permissive. Jones, 2002 WL 1334812, at *2.

To resolve his uncertainty, Judge McKenna initially ruled that the counterclaims, being permissive, "must be dismissed for lack of an independent basis of federal jurisdiction." Id. He then ruled that, if he was wrong and if supplemental jurisdiction under section 1367 was available, he would still dismiss the counterclaims in the exercise of the discretion subsection 1367(c) gives district courts. Id. Without explicitly stating on which of the four subdivisions of subsection 1367(c) he relied, Judge McKenna gave the following reasons for declining to exercise supplemental jurisdiction:

[1] The claims and counterclaims arise out of the same occurrence only in the loosest terms.... There does not exist a logical relationship between the essential facts [to be proven] in the claim and those of the counterclaims.

[2] [A]llowing defendant's counterclaims to proceed in this forum might undermine the ECOA enforcement scheme by discouraging plaintiffs from bringing ECOA claims due to the fear of counterclaims.

[3] [T]he interests of judicial economy will not be served by joining the claim and counterclaims in one suit [because of] what would most likely be a tremendous number of separate collection actions, each based on facts specific to the individual plaintiffs involved.

Id. at *2-*3. Judge McKenna stated his belief that it would be "unfair and inexpedient" to require absent class members who resided outside of New York to litigate their debt collection actions in the Southern District of New York and that there was no good reason to litigate the debt collection actions in a federal court. Id. at *3.

On March 27, 2003, the District Court entered judgment pursuant to Fed.R.Civ.P. 54(b) in favor of the Plaintiffs, dismissing Ford Credit's counterclaims without prejudice. Ford Credit appeals from this decision.

Discussion

I. Are Ford Credit's Counterclaims Permissive?

Fed.R.Civ.P. 13(a) defines a compulsory counterclaim as

any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties of whom the court cannot obtain jurisdiction.

Such counterclaims are compulsory in the sense that if they are not raised, they are forfeited. See Critical-Vac Filtration Corp. v. Minuteman International, Inc., 233 F.3d 697, 699 (2d Cir.2000). Fed.R.Civ.P. 13(b) defines a permissive counterclaim as "any claim against an opposing party not arising out of the transaction or occurrence that is the subject matter of the opposing party's claim."

Whether a counterclaim is compulsory or permissive turns on whether the counterclaim "arises out of the transaction or occurrence that is the subject matter of the opposing party's claim," and this Circuit has long considered this standard met when there is a "logical relationship" between the counterclaim and the main claim. See United States v. Aquavella, 615 F.2d 12, 22 (2d Cir.1979).¹ Although the "logical relationship" test does not require "an absolute identity of factual backgrounds," id. (internal citation omitted), the "`essential facts of the claims [must be] so logically connected that considerations of judicial economy and fairness dictate that all the issues be resolved in one lawsuit.'" Critical-Vac, 233 F.3d at 699 (emphasis omitted) (quoting Adam v. Jacobs, 950 F.2d 89, 92 (2d Cir.1991)); see also Harris v. Steinem, 571 F.2d 119, 123 (2d Cir.1978); United Artists Corp. v. Masterpiece Productions, Inc., 221 F.2d 213, 216 (2d Cir.1955).

We agree with the District Court that the debt collection counterclaims were permissive rather than compulsory. The Plaintiffs' ECOA claim centers on Ford Credit's mark-up policy, based on subjective factors, which allegedly resulted in higher finance charges on their purchase contracts than on those of similarly situated White customers. Ford Credit's debt collection counterclaims are related to those purchase contracts, but not to any particular clause or rate. Rather, the debt collection counterclaims concern the individual Plaintiffs' non-payment after the contract price was set. Thus, the relationship between the counterclaims and the ECOA claim is "logical" only in the sense that the sale, allegedly on discriminatory credit terms, was the "but for" cause of the non-payment. That is not the sort of relationship contemplated by our case law on compulsory counterclaims. The essential facts for proving the counterclaims and the ECOA claim are not so closely related that resolving both sets of issues in one lawsuit would yield judicial efficiency. Indeed, Ford Credit does not even challenge the ruling that its counterclaims are permissive.

II. Is There Jurisdiction over the Permissive Counterclaims?

For several decades federal...