Sparrow v. Mazda American Credit

• Decision Date: 26 August 2005
• Docket Number: No. 1:04-CV-06659OWWSMS.,1:04-CV-06659OWWSMS.
• Citation: 385 F.Supp.2d 1063
• Parties: Cobrain SPARROW Plaintiff, v. MAZDA AMERICAN CREDIT, Defendant.
• Court: U.S. District Court — Eastern District of California

385 F.Supp.2d 1063

Cobrain SPARROW Plaintiff, v. MAZDA AMERICAN CREDIT, Defendant.

No. 1:04-CV-06659OWWSMS.

United States District Court, E.D. California.

August 26, 2005.

COPYRIGHT MATERIAL OMITTED

Joshua Branden Swigart, Robert Lyman Hyde, Hyde and Swigart, San Diego, CA, for Plaintiff.

Dana Y. Kim, Severson and Werson, Irvine, CA, Regina J. McClendon, Severson and Werson, San Francisco, CA, Laura Greco, Severson & Werson, Irvine, CA, for Defendant.

MEMORANDUM DECISION AND ORDER GRANTING PLAINTIFF'S MOTION TO DISMISS DEFENDANT'S COUNTERCLAIMS PURSUANT TO FED. R. CIV. P. 12(b)(1)

WANGER, District Judge.

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 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, 98 S.Ct. 2396, 57 L.Ed.2d 274 (1978). Federal courts have original jurisdiction over all civil actions "arising under the 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 non-moving party bears the burden to establish that subject matter jurisdiction exists. Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 378, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994).

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 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, 94 S.Ct. 2504, 41 L.Ed.2d 243 (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, 94 S.Ct. 2504; 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." 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 Channell, 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 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, 86 S.Ct. 1130, 16 L.Ed.2d 218 (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, 118 S.Ct. 523, 139 L.Ed.2d 525 (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 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,...